Golden Agri Resources - DBS Research 2016-08-15: Dragged by lower yields

GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri Resources - Dragged by lower yields

2Q16 core net profit of US$42.1m was below on an annualised basis.
Performance was dragged by 36% y-o-y drop in CPO output, offset by higher CPO ASP, US$96m tax gains.
Palm & Lauric 2Q16 EBITDA drop 62% y-o-y due to difficulties in securing CPO amid tighter supplies.

FY16F/17F earnings adjusted by +12%/-9%; TP adjusted to S$0.34 on expectations of faster FFB yield recovery from FY17F onwards.

Golden Agri Resources (GGR)’s 2Q16 core net profit came in at US$42.1m (-51% y-o-y; +4% y-o-y). This brought 1H16 core earnings to US$82.5 – representing c.40% of our initial full year estimates and 38% of consensus full year expectations vs. 48% historical average. The weaker than expected performance was attributable to a 36% y-o-y decline (-17% q-o-q) in its 2Q16 crude palm oil (CPO) output – partly offset by 4% y-o-y higher (+17% q-o-q) CPO average selling price (ASP) for the quarter.
Reported earnings for the quarter came in at US$39.5m (+279% y-o-y; -58% q-o-q), which included net FX loss of US$21.2m and net tax credit of US$96.4m.
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 further tax gains in the remainder of the year, subject to approval.

For the quarter, combined FFB output from GGR’s own and smallholder estates dropped by 34% y-o-y (-14% q-o-q) to 1.614m MT. This was in addition to 12% y-o-y decline in the previous quarter. Of this amount, own estates contributed 1.277m MT (-31% y-o-y; -13% q-o-q).
Reflecting the tighter supply, the group’s 2Q16 CPO ASP recovered by 4% y-o-y (+17% q-o-q), resulting in Plantations segment revenue of US$296m (-32% y-o-y; -3% q-o-q). 2Q16 Plantations EBITDA hence dropped 34% y-o-y (-4% q-o-q) to US$73m – translating to EBITDA margins of 25%, from 26% in 2Q15.
Based on 2Q16 results, the management now guides for a steeper FFB output drop of between 15% and 20% for the full year – reduced further from previous guidance of 10-15% drop.

GGR’s Palm & Lauric did not fare any better, as the segment also reported 62% y-o-y decline (-79% q-o-q) in 2Q16 EBITDA to US$13m – translating to EBITDA margin of 0.8% - down from 2.0% in 2Q15. We understand tighter CPO supplies during the quarter had caused its origination costs to spike – causing margin erosion to the group’s refining and processing business. Yet, the group managed to expand share of direct destination sales to 75% from 70% in FY15.
GGR was 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 eventually expand by an additional 300 MT p.a. (complete with supporting infrastructure) at a cost of c.US$100m, making up most of its US$110m downstream capex this year. Total FY16F capex is projected at US$180m, of which US$104m was spent in 1H16.

2Q16 EBITDA contribution in the Oilseeds swung back to US$1.3m loss (from EBITDA of US$3.0m in 2Q15 and US$4.0m in 1Q16). We understand this reversal was attributable to mark-to-market losses on soybean origination.
While the group’s effort to spin off its oilseeds crushing plant in Tianjin has yet to progress, the group may now restart discussions with other parties.

We understand restocking demand from both China and India could add c.1.0-1.5m MT demand in the near term – potentially pushing CPO prices back towards US$700/MT.
However, this remains subject to movements in soybean oil prices and whether the Indonesian government is intent on enforcing penalties for non-compliance in biodiesel programme. Indicatively, the group also expects FY17F FFB output to return to FY15F level.

We cut FY16F combined FFB output (own and smallholder estates) by 8% to 8.314m MT – but raised FY17F FFB output by 9% to 9.922m MT – as we imputed the management’s latest guidance.
We also adjusted GGR’s FY16F earnings to include 2Q16 tax credit which, combined with slightly higher PK ASP, resulted in +12%/-9% revisions in FY16F/17F earnings. On the EBITDA level, changes in our forecasts result in 4% lower EBITDA each in FY16F and FY17F – vis-a-vis previous forecasts.

Imputing the above changes, our DCF-based TP is adjusted slightly upwards to S$0.34 (WACC 10.6%; TG 3%). The higher TP reflects faster FFB yield recovery from FY17 onwards.
Our new TP implies c.8% downside from current level. We do not have a rating on this counter.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-08-15

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