Golden Agri Resources - DBS Research 2016-05-16: Stronger downstream offsets El Nino impact

Golden Agri Resources - DBS Research 2016-05-16: Stronger downstream offsets El Nino impact GOLDEN AGRI-RESOURCES LTD E5H.SI 

Golden Agri Resources - Stronger downstream offsets El Nino impact

  • 1Q16 core net profit of US$40.4m was below expectations on annualised basis
  • Reported EBITDA grew 11% y-o-y - slower-than- expected - dragged by El Nino and lower ASP
  • Palm & Lauric EBITDA up 179% y-o-y on better margins and volume gains
  • Expect softer sequential downstream margins, mitigated by better CPO ASP. 
  • FY16F/17F cut by 5%/25%; TP trimmed to S$0.35.



Highlights


1Q16 earnings below expectations.

  • Golden Agri Resources (GGR)’s 1Q16 core net profit came in at US$40.4m (+65% y-o-y). This made up c.17% of our full year estimates and 19% of consensus full year expectations vs. 26% historical average. The weaker than expected performance was attributable to a 13% y-o-y decline in its crude palm oil (CPO) output and 16% lower average selling price (ASP) of CPO – which caused Plantations EBITDA to drop by 24%. This was partly mitigated by a 179% jump in downstream Palm & Lauric EBITDA. The group’s downstream segment margins had improved by 3.3ppts y-o-y, thanks to better margins and volume gains.
  • Reported earnings for the quarter which came in at US$94.1m (from restated loss of US$3.2m in 1Q15) included net FX gains of US$51.9m, fair value net gain of US$2.2m for biological assets, and net tax credit of US$14.5m.
  • The tax credit principally arose from Indonesian government’s one-off tax incentive last year, which
  • offered a reduced 3% tax rate on any fixed asset revaluation gains submitted before 31 Dec-16. We understand there could potentially be a tax gain of US$92m, spread over 8 quarters and subject to approval.

Fresh Fruit Bunch (FFB) output guidance cut again

  • For the quarter, GGR produced 1.870m MT of FFB (- 12% y-o-y) – reflecting the lagged impact of last year’s dry weather. Of this amount, own estates contributed 1.468m MT (-12% y-o-y). With 1Q16 CPO ASP declining by 16% y-o-y, the group’s Plantations segment revenue consequently dropped 11% (partly compensated by some drawdown in inventory) to US$304m, causing EBITDA to dip by a steeper 24% y-o-y to US$76m. Plantation EBITDA margin accordingly narrowed to 25% in 1Q16 from 29% in 1Q15 and 29% in 4Q15.
  • We understand the impact of dry weather has been more severe than initially anticipated, and that this year’s output would drop by steeper 10-15% y-o-y – reduced further from previous guidance of 5-10% drop.

Palm & lauric boosted by direct access

  • Volumes of direct selling to end-customers (as opposed to selling through traders) had increased and helped to extend the group’s visibility on securing the feedstock. This contributed to EBITDA margin expansion in Palm & Lauric; despite lower top line. Palm & Lauric’s EBITDA jumped 179% y-o-y to US$62m in 1Q16, translating to EBITDA margin of 4.9% (from 1.6% in 1Q15 and 2.4% in 4Q15).
  • We understand GGR has continued expand to end- markets such as Europe, US, and Middle East. Satisfying demand for sustainable palm oil had also played a part to this end.
  • The group has been allocated 58,231 kl of biodiesel production from Pertamina for a 6-month distribution term, from May-16 through Oct-16. This biodiesel allocation would come from its newly built 300k MT p.a. biodiesel plant located in South Kalimantan. Capacity at its biodiesel plant will expand by an additional 300 MT p.a. (complete with supporting infrastructure) at a cost of c.US$100m, which would make up most of its US$110m downstream capex this year. Total FY16F capex is projected at US$180m, of which US$49m had been spent in 1Q16.

Oilseeds & Others: stable, but still for sale

  • 1Q16 EBITDA contribution in the Oilseeds & Others improved to US$4.7m (from EBITDA of US$4.0m in 1Q15 and US$3.8m in 4Q15), attributed to an improved business environment for the oilseed business (i.e. lower feedstock costs).
  • However, margins are likely to deteriorate in subsequent quarters, owing to rising soybean prices and flattening soybean oil and meal prices due to intervention by the Chinese government (e.g. recent releases of rapeseed oil and frozen pork reserves) to stem inflation. We understand the group continues to explore ways to spin off its oilseeds crushing plants.



Outlook


FY16F/17F earnings cut by 5%/25%

  • We understand the strong Palm & Lauric downstream margins were higher than usual and hence may not be sustainable in subsequent quarters.
  • Having imputed a steeper drop in the group’s FFB yields, we now expect GGR to book 11% and 20% lower EBITDA in FY16F and FY17F, respectively, than our previous forecasts. This would be partly compensated by prospective tax credit of US$92m, which we assume to be evenly distributed between FY16F and FY17F.
  • Based on our revised forecasts, the group’s combined FFB output (own and smallholders estates) would decline 10% y-o-y this year to 9.015m MT (translating to CPO output of 2.128m MT).


Valuation

  • Reflecting the above changes, we lowered our DCF- based TP to S$0.35 (WACC 11.1%; TG 3%) from S$0.38 previously. This implies c.5% downside from current level. 
  • We do not have a rating on this counter.




Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-05-16
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.35 Down 0.38


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