GOLDEN AGRI-RESOURCES LTD
E5H.SI
Golden Agri-Resources - Bracing for higher depreciation charges
- El Nino is expected to cloud the group’s FFB output growth prospects.
- Plans to commission two biodiesel plants in 2016 to cater to Indonesia’s biodiesel mandate.
- Changes in IAS 41 could raise its depreciation charges by US$77m in FY16.
- Project GGR to post lower earnings in FY16 due to higher depreciation charges.
- Maintain Reduce due to its unexciting near-term earnings prospects.
■ 9M15 earnings impacted by lower CPO prices GGR’s
9M15 core earnings fell 17% yoy as better refining margins could not offset lower CPO prices. Its palm and laurics business posted stronger 3Q earnings as it benefited from the potential levy implementation as well as its efforts to optimise its downstream business. Its oilseeds-crushing business in China stayed profitable due to positive crush margins.
■ El Nino could lead to lower output in 2016
- The group maintained its output growth guidance of 0-5% for 2015. It also revealed that 70% of its estates were severely affected by the recent Indonesian drought and preliminary indications were that the El Nino-induced drought could cut Indonesia palm oil output by 10% in 2016 and raise CPO prices to around US$700 per tonne.
■ Plans to commission two biodiesel plants in 2016
- It is building two 300,000tpa biodiesel plants in Indonesia, which will be ready by 2016 and will benefit from Indonesia’s biodiesel policy.
- The group expects Indonesia to consume 2m tonnes of biodiesel in 2016, which is conservative compared to the government’s target of 4m tonnes.
■ IAS 41 changes will led to higher depreciation charges
- The accounting changes of IAS 41 will reduce GGR’s shareholders’ equity by US$5bn to US$3.71bn and raise the group’s depreciation charges by around US$77m beginning in FY16 as the new accounting policy requires the mature estates to be depreciated over their useful lives.
- The group has also revealed that its debt-over-equity ratio will rise from 0.35x to 0.83x following the accounting changes but it will not affect any of its debt covenants, which have a threshold debt-to-equity ratio of 1.5x.
■ Projecting weaker earnings in FY16
- We expect Golden Agri to post lower earnings in FY16 as the higher depreciation charges due to the changes in accounting standards are expected to more than offset the benefits of higher CPO prices.
- However, there is potential upside to our earnings if the group is successful in raising the value-add from its downstream business.
■ Maintain Reduce and target price of S$0.35
- We maintain our Reduce call given the group’s unexciting near-term earnings prospects stemming from currently weak CPO prices and slower output growth.
- Our target price of S$0.35, which is based on its historical average P/E of 15x, is intact.
Ivy NG Lee Fang CFA
CIMB Securities
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http://research.itradecimb.com/
2015-12-09
CIMB Securities
SGX Stock
Analyst Report
0.35
Same
0.35
