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Golden Agri-Resources - UOB Kay Hian 2016-03-01: 2015 Within Expectation; Non-plantation Divisions Deliver Better Earnings

Golden Agri-Resources - UOB Kay Hian 2016-03-01: 2015: Within Expectation; Non-plantation Divisions Deliver Better Earnings GOLDEN AGRI-RESOURCES LTD E5H.SI 

Golden Agri-Resources (GGR SP) 2015: Within Expectation; Non-plantation Divisions Deliver Better Earnings 

  • GGR reported a core net profit of US$50.9m (+10% yoy, -17% qoq) in 4Q15 and US$221.4m (flat yoy) in 2015. Results were within our expectation. 
  • Weakness was seen in upstream operations due to weaker CPO prices. But this was offset by better contribution from its palm and laurics segment’s better EBITDA margins in 2015. 
  • Upstream production is expected to be weaker in 2016 due to dryness in 2015. 
  • Downstream operations in Indonesia and China should continue to improve on better sales volume. 
  • Maintain BUY. Target price: S$0.44. 


RESULTS 


• Within expectation. 

  • Golden Agri (GGR) reported a core net profit of US$50.9m (+10% yoy, -17% qoq) in 4Q15 and US$221.4m (flat yoy) in 2015. Results were within our expectation. 
  • The weakness in upstream operations was due to weaker CPO selling prices. But this was offset by a turnaround in the performance of its palm and laurics as well as oilseeds operations in China. 
  • Both segments delivered better EBITDA margins in 2015. 

• GGR proposed a final dividend of 0.502 S cents (2014: 0.585 S cents). 

  • The ex-date is on 25 Apr 16. More details on the segmental breakdown of GGR’s performance and guidance will be provided post an analyst briefing later today. 


STOCK IMPACT 


• Strong performance from downstream compensated for the weakness in CPO ASP. 

  • GGR’s palm and laurics operation reported 89% yoy net profit growth to US$108.7m, a record-high for GGR thanks to better margins on the back of management’s efforts to increase sales destination markets and ramp up cost management. 
  • Also, the current and forward CPO price disparity in 4Q15 has also helped widen profit margins for refiners. 

• Net tax credit. 

  • GGR reported a net tax credit of US$35.6m in 2015 mainly due to recognition of deferred income tax assets and lower profit recorded during the year. The deferred tax assets were mainly due to losses on changes in fair values of biological assets, as well as other deductible timing differences. 

• Flattish production for 2015; likely to stay flat or see slightly lower production for 2016. 

  • GGR reported marginal growth in palm product output of 2.97m tonnes in 2015 vs 2.95m tonnes for 2014. Despite having added new planted areas in 2015, GGR recorded only a marginal increase due largely to trees suffering from water stress in some of the planted areas in 2014 and 2015. 
  • We are expecting a 2% contraction in 2016 fresh fruit bunch (FFB) production for GGR. CPO production could be flat with higher intake of third-party FFB to be processed by its mills to optimise utilisation rates. 

• Downstream operations expected to stay profitable but still very volatile. 

  • GGR’s palm and laurics division might experience margin compression as the availability of CPO is relatively tight due to low production and competition from biodiesel producers. However, the segment is likely to remain profitable. 

• China operations turned around in 2015 but still a tough market. 

  • 2015 was a relatively good year for soybean crushers in China, given that there was no market distortion by financial traders and soybean meal prices were better on good demand. However, to stay profitable, GGR must maintain a high utilisation rate in a sector which is still plagued by overcapacity. 


EARNINGS REVISION/RISK 

  • Maintain our earnings forecast for 2016 and 2017 pending more information from a briefing this morning. 
  • We introduce our 2018 net profit forecast of US$259m, which is lower than our forecast for 2017 mainly due to our lower CPO price assumption of RM2,500/tonne vs RM2,600/tonne for 2017. 


VALUATION/RECOMMENDATION 


• Maintain BUY with a target price of S$0.44, based on 15x 2016F PE (5-year average). 

  • GGR is one of the plantation stocks in the sector with a high beta to the CPO price trend. 
  • In view of the expected rise in CPO prices on the back of tight supply and decent demand growth coming from Indonesia’s biodiesel usage, we expect GGR’s share price to track CPO price trends if the company continues to meet earnings expectations. 


SHARE PRICE CATALYST 


• Better-than-expected CPO prices. 

  • GGR being one of largest upstream players in the sector has the highest leverage to CPO prices. 

• Merger and acquisition. 

  • Given GGR’s large-scale upstream operations and production, GGR can benefit significantly if it expands its downstream operations to capture the full value chain. 
  • A strategic tie up or JV with a company that provides better market access will be positive for GGR. 

• Disposal of non-core operations, i.e. oilseed operation in China. 

  • This division does not contribute much to the group and is volatile in its operations. GGR will benefit from the disposal of this operation and should concentrate on expanding its palm operations.



Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.440 Same 0.440


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