GOLDEN AGRI-RESOURCES LTD
E5H.SI
Better Than Expected
- Golden Agri’s 1H15 core earnings were better than expected as its downstream business in Indonesia improved after struggling with overcapacity issues.
- We maintain our BUY call on the stock, with our TP trimmed to SGD0.48 (from SGD0.53, 50% upside), based on an unchanged 16x FY16 PER, to factor in the new accounting treatment for biological assets.
Results better than expected.
- Stripping out forex losses, Golden Agri’s 1H15 core earnings were better than expected on an improvement in its downstream business. 1H upstream production was down 5%, making up 44% of our full-year expectations.
Downstream improvement.
- The downstream segment i.e. palm and laurics saw a 56% QoQ increase in earnings. YTD earnings grew by 38%.
- We are hopeful this improvement will be sustained as it could be due to the market’s earlier-than-expected adjustment for the export levy implementation in July.
Earnings adjustment.
- We factored in a 1% improvement in Golden Agri’s downstream margin, resulting in FY15F core earnings rising 14% to USD190m from USD167m previously. For FY16F, however, the downstream margin increase is more than offset by a USD77m increase in depreciation due to a change in accounting standards.
- We cut our FY16 earnings forecast by 10% to USD282m.
New standards.
- The above mentioned new accounting standards will come into effect in Jan 2016 and replace the rather pointless IAS41 fair value accounting for biological assets. The new standards require biological assets to be depreciated over its useful life, much like treatment for property, plant and equipment.
- We have made this adjustment only for Golden Agri as it is the only company so far that has quantified the impact on earnings.
Key Risks.
- Weaker than expected production and/or palm oil price as well as processing and crushing margins.
Singapore Research | http://www.rhbgroub.com/ RHB Securities 2015-08-14
0.48
Down
0.53
