Golden Agri-Resources - 1Q17 Strong Set Of Earnings On Better Performance From Plantation Segment
Results within expectation.
- For 1Q17, Golden Agri Resources (GGR) reported a core net profit of US$84m (+34.7% qoq, vs a loss of US$12.6m in 1Q16). Results were within expectation. We are expecting weaker results in 2Q17 as FFB production could come in lower qoq due to the 20-24 months’ lagged impact from the severe drought in 2015.
- The strong performance qoq in 1Q17 was mainly supported by a marginal improvement in plantation segment as well as a turnaround in oilseeds segment.
- On a yoy basis, the plantation segment’s EBITDA increased significantly, mainly supported by higher sales volume on the back of production recovery as well as the jump in CPO prices.
Maintain FFB production growth forecast of 12% yoy for 2017.
- We maintain our FFB production growth forecast of 12% yoy for 2017, which is lower than management’s guidance of 15-20% yoy. We are more conservative as the production recovery may not be as strong as expected as more than 42% of GGR’s nucleus planted areas are >19 years old. We understand old trees tend to take a longer time to recover.
- For 1Q17, FFB nucleus production was 1.9m tonnes, which accounts for 25% of our full-year estimates. Management indicated that 1H:2H production ratio would be 40%:60% for 2017.
- With expectations of weaker production in 2Q17 due to the 20-24 months’ lagged impact from 2015’s drought, we believe that the production is on track to meet our full-year estimates.
Higher biodiesel volume secured.
- GGR’s first biodiesel plant, with capacity of 300,000 tonnes, is located in Tarjun and started operations in Apr 16. The construction of its second biodiesel plant is on track, and will bring an additional 300,000 tonnes of production capacity to GGR. It managed to secure higher biodiesel supply contract of 95,236kl from Pertamina for May 17-Oct 17, which is 25% higher compared with Nov16-Apr17 allocation.
- According to an announcement by the Ministry of Energy and Mineral Resource (ESDM), the biodiesel subsidy will change to new pricing formula of CPO base price+US100/tone from CPO base price+US$125/tonne, and is most likely to be effective Jun 17.
- Despite the change in biodiesel subsidy, it is still profitable to GGR and its earnings will be partly compensated by higher biodiesel volume secured.
- Maintain net profit forecasts. We are expecting EPS of 2.2 US cents, 2.2 US cents and 2.6 US cents for 2017-19 respectively.
- Maintain HOLD and target price of S$0.45, pegged at 15x 2017F PE, its five-year average, and in line with Singapore peers’ valuations.
- Despite the recent share price weakness (-12.8% ytd), we maintain our HOLD recommendation for now.
- We are reviewing our recommendation as sentiment is expected to further weaken in a situation of palm oil supply outweighing demand, which is likely to happen in 2H17 when production picks up strongly amidst normalising yields but demand remaining stagnant.