Golden Agri-Resources - CIMB Research 2017-02-26: 4Q earnings fall short as plantation disappoints

GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources - 4Q earnings fall short as plantation disappoints

Final core profit below our/consensus forecasts due to weaker plantation earnings.
The tax credit of US$304m contributed most of the earnings growth in FY16.
It maintained its guidance for its FFB output to grow by 15-20% for FY17.

Golden Agri’s FY16 core net profit (excluding tax benefit, gain from fv changes in biological assets, exceptional loss, and forex gain) of US$57m was below our full-year net profit forecast of US$105m and consensus of US$150m.
The poor performance was due mainly to weaker-than-expected plantation and oilseeds earnings. As such, the final dividend of S$0.00635 was also below our forecast.

The 4Q16/FY16 reported net profit of US$46m/US$400m were above our forecasts due to net tax credit of US$62m/US$304m in 4Q16/FY16.
GGR revalued its plantation assets to take advantage of the lower 3% tax rate on revaluation gains in 2015 instead of 10%. This allowed it to book substantial one-off tax income for the year.
The group also recognised a forex gain of US$47m, net gain from changes in fv of biological assets of US$34m and exceptional loss on impairment loss of its China assets of US$34m in FY16.

Plantation EBITDA fell 9% yoy in FY16 as the rise in CPO price was insufficient to offset the 11% fall in nucleus estates’ FFB output. But 4Q plantation EBITDA rose 55% qoq and 30% yoy on higher output and ASP.
The key drag on earnings vs. our forecast was higher depreciation to US$349m in FY16, from US$176m (before restatement) in FY15, with the adoption of IAS16 and IAS41.
Its downstream division posted a 25% qoq drop in earnings due to lower refining margins, while oilseeds and grains posted a loss of US$6m in 4Q16.

The group has maintained its guidance for FFB output to recover to its 2015 level, which suggests a 15-20% yoy rise in output in FY17.
For 2017, the group has guided for a lower cost of production of US$300/tonne against its achievement of US$304/tonne in FY16 due to higher output. The group also revealed that it plans to replant around 10,000 ha of estates in 2017, which represents 2% of its total planted area.

The group has maintained its plans to reduce exposure to its oilseeds and grains operations via a joint venture or disposal of its crushing plant. The US$35m exceptional loss in 4Q16 relates to the asset impairment loss of a plant in Zhuhai, which the group closed in mid-2016.
We gather that the oilseeds business remains challenging and the group will be adding a second biodiesel plant in Indonesia in 2H2017.

We finetune our earnings forecasts but lower our target price (15x historical P/E) to reflect weaker earnings.
Our Reduce call is intact due to concerns over its unexciting output prospects beyond FY17 as 44% of its estates are above 19 years old and will need to undergo replanting when they are 25 years old.
A key upside risk is higher-than-expected CPO prices.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2017-02-26

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