Golden Agri-Resources - UOB Kay Hian 2015-11-13: 3Q15 ~ Oilseeds Division Continues To Improve

Golden Agri-Resources - UOB Kay Hian 2015-11-13: 3Q15 ~ Oilseeds Division Continues To Improve GOLDEN AGRI-RESOURCES LTD E5H.SI 

Golden Agri-Resources (GGR SP) - 3Q15: Oilseeds Division Continues To Improve 

  • GGR’s 3Q15 results came in within expectations. 
  • Its oilseeds segment recorded a better qoq performance, while the plantation division remained weak. 
  • The palm and laurics segment’s operational performance weakened marginally qoq due to lower sales volume and EBITDA margin, but the division reported a better set of yoy results. 
  • Production is expected to stay low due to the lagged impact from dry weather. 
  • After factoring in the higher CPO prices, lower production and higher depreciation from the change in accounting standard, we derive a target price of S$0.44. Maintain BUY. 


RESULTS 


 GGR reported core net profit of US$61.2m (+6.8% qoq, +>100.0% yoy) in line with expectations. 

  • Golden Agri Resources’ (GGR) 9M15 core net profit came in at US$170.6m (- 2.9% yoy). 
  • The slight drop in 9M15 net profit was attributed to the weaker performance of its plantation and palm oil mills operations, which were affected by lower CPO prices and lower CPO production (-4.1% yoy). 

 Oilseeds division continued to improve. 

  • Oilseeds EBITDA rose 5.9% qoq in 3Q15 (vs loss in 3Q14) despite a drop in sales volume (-18.5% qoq, -25.1% qoq). EBITDA margin improved to US$10.4/tonne in 3Q15 (vs US$8/tonne in 2Q15, loss in 3Q14) largely due to crushing margins in China improving on the back of lower soybean prices and the lower scale of market distortion by financial traders. 
  • For 9M15, this division reported EBITDA of US$8.3m, a turnaround from last year’s loss of US$61.4m. 

 Weak plantation division. 

  • Plantation EBITDA dipped 12.5% qoq and 12.4% yoy mainly due to lower CPO ASP despite recording a marginal increase in both fresh fruit bunch (FFB) and CPO production. Meanwhile, 9M15 EBITDA was affected by the lower CPO prices (-26.2% yoy) and weaker CPO production (-4.1% yoy). 

 Palm and laurics (downstream) division weakened qoq. 

  • The palm and laurics division reported a net profit of US$27.4m in 3Q15 (-18.7% qoq) mainly due to the drop in sales volume (-9.5% qoq) and lower EBITDA margin of 1.9% (vs 2.1% in 2Q15). However, this division still registered stronger 9M15 results. 
  • EBITDA surged 76.6% yoy to US$76.6m on the back of higher sales volume (+8.7% yoy) and a better EBITDA margin of 1.9%. 
  • This division accounted for about 20% of 9M15 EBITDA. 


STOCK IMPACT 


 FFB production to stay low. 

  • Management maintained its guidance of flat/marginal growth in FFB production for 2015. For 9M15, FFB production was down -0.6% yoy due to the lagged impact from the dry weather in Kalimantan in 2H14. GGR indicated that 70% of the total planted areas experienced severe dryness over the past few months. This could potentially affect its production in 2016. 
  • Management is looking for an average 10% drop in production in 2016. 
  • We have adjusted down our production growth to 2.2% from 5.5% growth for 2016. We are less pessimistic vs management’s guidance. 

 Construction of biodiesel plants is on track. 

  • GGR expects to benefit from the biodiesel mandate in Indonesia. The company is constructing two biodiesel plants with capacity of 300,000 tonnes each. The first plant which is located in Kalimantan is expected to commercialise in 1Q16 and start contribution in 2Q16. 
  • GGR missed the recent biodiesel procurement round by Pertamina. The next allocation will come by end-Apr 16 or May-16. 

 China crushing margin is expected to stay positive for 4Q15

  • China crushing margin is expected to stay positive for 4Q15 and EBITDA margins are likely to be similar to that of 3Q15. The turnaround in the crushing business in China was mainly due to company’s strategy to focus on delivering products at optimum costs vs its focus to grab market share previously. 


EARNINGS REVISION/RISK 

  • We revised our 2016-17 net profit forecast downwards by 11% respectively to factor in: 
    1. higher CPO price forecast of RM2,500/tonnes in 2016 and RM2,600/tonnes in 2017, 
    2. lower production growth, and 
    3. higher depreciation post amendments to FRS14. 
  • The adjustment to our CPO price forecasts mainly comes on the back of the prolonged dry weather conditions which could dampen production drastically moving forward and hence spur a CPO price movement. 
  • We are expecting an EPS of 1.8 US cents, 2.0 US cents and 2.1 US cents for 2015-17 respectively. 


VALUATION/RECOMMENDATION 

  • Maintain BUY with a lower target price of S$0.44 (previously S$0.48), based on 15x 2016F PE, based on a five-year average, and in line with Singapore peers’ valuations. 
  • We believe GGR will benefit from Indonesia’s export levy and biodiesel policies, given its integrated business model. 


SHARE PRICE CATALYST 

  • Better-than-expected CPO prices. 
  • Turnaround in its Chinese soybean crushing operations to continue. 
  • Weather disruption affecting global oilseed, palm oil and sugar supplies, leading to stronger prices.


Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.440 Down 0.480

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