Golden Agri-Resources - OCBC Investment 2016-05-16: Slow Start To FY16

Golden Agri-Resources - OCBC Investment 2016-05-16: Slow Start To FY16 GOLDEN AGRI-RESOURCES LTD E5H.SI 

Golden Agri-Resources - Slow Start To FY16

  • Core earnings just 17% of full-year forecast 
  • Integrated model to support margins
  • No catalyst just yet

Slow start to FY16

  • Golden Agri-Resources (GAR) made a slow start to FY16, still hit by lower CPO production (-13%) and lower CPO market prices (-6%), as revenue fell 4% to US$1493.6m; this meeting just 21% of our full- year forecast. 
  • Nevertheless, it did see improved margins, thanks to its integrated business model. 
  • EBITDA jumped 11% to US$141.9m, while GAR turned in a reported PATMI of US$94.1m versus a loss of US$3.2m in 1Q15. However, that figure was boosted by forex gain; still, core earnings of US$40m was up about 67% from the comparable core in 1Q15, though it only met 17% of our FY16 estimate.

Expects CPO output to slip more

  • Assuming the trend in 1Q16 continues, GAR expects to see its CPO production fall by some 10-15% this year, even lower than its initial expectation of a 8-10% fall; this is also slightly worse than the industry's 5-10% drop due to the more matured profile of its plantations (average age now 16 years). 
  • And to reduce its age profile, GAR expects to spend US$70m to replant as much as 10k ha this year; it had replanted about 1.3k ha in 1Q16.

Margins should remain stable

  • But GAR expects the impact to be mitigated by the rising CPO prices, supported by the bio-diesel mandate. 
  • In addition, management believes that its ongoing effort to grow its downstream business will continue to optimise margins via further vertical integration of its operations. 
  • It also intends to build another bio-diesel plant as well as logistics facilities to enhance its integrated operations for US$110m. 
  • Management noted that one reason for the more stable margins is having the benefit of a "destination book", where it is able to sell directly to the end customers, as opposed to selling to middle men previously.

Maintain HOLD

  • We are paring our FY16 core earnings estimate by 9%; but our fair value remains unchanged at S$0.34 (12.5x valuation from FY15F vs. blended FY15/16F EPS). 
  • Maintain HOLD.

Carey Wong CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-05-16
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.34 SAME 0.34