Golden Agri-Resources - UOB Kay Hian 2016-08-15: 2Q16 Earnings Boosted By Deferred Tax Income

GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources (GGR SP) - 2Q16: Earnings Boosted By Deferred Tax Income

GGR’s 2Q16 net profit was boosted by a deferred tax income but pre-tax losses were due to a significant drop in FFB production which led to high cost per unit.
Downstream is expected to do better in 2H16, but FFB yield recovery will be slower.
We cut our FFB nucleus production growth forecast to -15% yoy for 2016 and core net profit forecast downwards by 45%. We have made huge changes to our 2016 forecasts due to the exclusion of deferred tax income.

Golden Agri (GGR) reported a net profit of US$39.5m (-58.0% qoq, +>100.0% yoy) for 2Q16, bringing 1H16’s to US$133.6m (+>100.0% yoy).
The higher net profit was mainly boosted by a deferred tax income arising from the increase in tax depreciable value of its plantation assets. This is within expectation as management had previously indicated that it expected a deferred tax income to be recorded in 2Q16.
The net tax impact recorded from this revaluation was US$131m for 1H16, which includes US$104m in 2Q16.
Management expects a similar deferred tax income to be recorded in 2H16. Excluding the deferred tax income, 2Q16 recorded a core net loss of US$54.4m, while 1H16’s came in at US$14.0m.

The poor 2Q16 performance was mainly due to weak FFB production, but this was partly mitigated by stronger CPO ASP qoq.
For 1H16, EBITDA decreased by 29.4% mainly due to the lower FFB production and CPO ASP. CPO ASP for 1H16 was at US$617/tonne, compared with US$665/tonne in 1H15.

EBITDA contracted 79.6% qoq to US$12.6m (-61.8% yoy) for 2Q16 mainly due to weakening palm oil supply causing refining margins to compress.
2Q16 EBITDA margin was squeezed to 0.8% vs 4.9% in 1Q16 and 2.0% in 2Q15.
Despite a weaker 2Q16 performance, EBITDA increased by 35% yoy in 1H16 due to GGR registering strong earnings in 1Q16 as it benefitted from selling old inventory at high prices.
All in all, we that the good refining margin recorded in 1Q16 will not be sustainable, while its normalised EBITDA margin could be at around 2-3% for the year.

This division registered an EBITDA loss of US$1.3m (vs US$4.1m in 1Q16, US$3.0m in 2Q15) for 2Q16. The weak performance was in line with our expectation as we had expected the oilseeds business in China to remain challenged.
For 1H16, EBITDA margin was 0.8% (-50.3% yoy), mainly due to higher purchase cost of soybeans.
Meanwhile, management is expecting its oilseeds business’ EBITDA margin to come in at about 1% for 2016.

For 1H16, nucleus FFB production dipped 22.2% yoy to 2.7m tonnes. Management expects FFB production to recover slowly in 2H16 and likely register peak production in Nov/Dec 16.
In view of the slow recovery, management has revised its nucleus FFB production guidance downwards to reflect a 15-20% yoy decline for 2016 vs a 10-15% decline previously. Thus, we have also adjusted our nucleus FFB production growth forecast downwards to -15% yoy from - 12% yoy for 2016, which is in line with management’s guidance.
The production ratio would be at 40% from 1H16 and 60% from 2H16. Meanwhile, we are expecting 2017-18 FFB production growth of 6.8% yoy (vs 2.7% yoy previously) and 9.2% yoy (vs 10.2% yoy previously) respectively as production is expected to recover as rainfall has been good in 1H16 and there has been no further stress on trees.

We have adjusted our 2016-18 core net profit forecasts downwards by 45%, 4% and 3% respectively to factor in FFB production growth adjustment due to the slow recovery, while the significant changes in our 2016 core net profit forecasts was mainly due to the exclusion of deferred tax income which we deem as one-off and would not recur in 2017.
We are expecting an EPS of 1.0 US cents, 2.1 US cents and 2.1 US cents for 2016-18 respectively.

Maintain BUY with lower target price of S$0.42 (S$0.44 previously) post earnings adjustment.
Our target price is pegged at 15x 2017F PE, its five-year average and in line with Singapore peers’ valuations.

As one of largest upstream players in the sector, GGR has the highest leverage to CPO prices.
Continuous turnaround in its Chinese soybean crushing operations.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-15

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.420 Down 0.440