Golden Agri-Resources - CIMB Research 2016-03-02: FFB output could fall 8-10% due to El Nino

Golden Agri-Resources - CIMB Research 2016-03-02: FFB output could fall 8-10% due to El Nino GOLDEN AGRI-RESOURCES LTD E5H.SI 

Golden Agri-Resources - FFB output could fall 8-10% due to El Nino 

  • At its 4Q results briefing, GGR guided that 2016 FFB output could fall by 8-10%. 
  • This and higher labour costs could raise production costs by 11% to US$310/tonne. 
  • The group indicated plans to consolidate the Indonesian estates held under Verdant Fund LP via distribution of the fund’s units. 
  • Plans to improve FFB yields via replanting of old estates with superior yield seeds. 
  • Maintain Reduce as 2016 earnings are unexciting due to lower output and higher depreciation charges. 

■ Mixed signals from GGR results briefing 

  • We are neutral following GGR’s FY15 results briefing as guidance of an 8-10% decline in output and higher depreciation charges of US$81m due to changes in the accounting policy for biological assets are offset by plans to potentially consolidate the Indonesian estates of around 15,000 ha held under Verdant Fund via distribution of the fund’s units. 
  • FFB output could fall by 8-10% in 2016 due to El Nino impact GGR guided for an 8-10% decline in FFB output for 2016 as FFB yields were adversely impacted by El Nino, which led to lower rainfall at its estates in 2015. 
  • The group indicated that FFB output for Jan was below its target and projects that the lower output and higher labor costs could raise its cost of production by 11% to US$310 per tonne. 

■ Focusing on improving long-term FFB yields 

  • GGR plans to enhance future productivity of its estates by replanting its old estates with high-yielding planting materials. It plans to replant 10,000 ha of estates in 2016, or a replanting rate of 3%. 
  • The group’s new planting will remain low at only 400 ha in 2016 due to its commitment to stringent sustainability criteria. 

■ Plans to optimise profit from downstream business 

  • The group has grown the volumes of processed palm products from 4.5m tonnes in 2011 to 8.8m tonnes in 2015, meeting the group’s target to process around 30% of Indonesia’s CPO output. This division bucked the industry trend by producing stronger refining margins in 2015 due to its efforts to optimise margins from this business. 

■ Financial impact from changes to IAS41 accounting policy 

  • The amendments to the IAS41 policy (biological asset) will raise the group’s depreciation charges by US$81m, or cut its FY15 core net profit of US$221m by 37% (2015’s proforma). 
  • This will also reduce the group’s plantation assets value in its book from US$7.8bn (implied estates value of US$20,292/ha) to US$1.2bn (US$3,093/ha) and shareholders’ equity to US$3.7bn in FY15. 
  • As a result, its gearing level will rise to 0.82x from 0.35x in FY15. However, this will not affect any of its debt covenants. 

■ Fine-tune earnings forecasts and maintain Reduce call 

  • We fine-tune our earnings forecasts to reflect the guidance from the group for lower output and to reflect lower-than-expected estates costs achieved in 2015. However, our target price ($S0.35, based on historical P/E of 15x) is intact as we assume a stronger S$. 
  • Maintain Reduce due to unexciting near-term earnings prospects.

Ivy NG Lee Fang CFA CIMB Securities | 2016-03-02
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 0.35 Same 0.35