Golden Agri-Resources - CIMB Research 2016-11-14: 3Q boost from tax credit and biological assets gain

Golden Agri-Resources - CIMB Research 2016-11-14: 3Q boost from tax credit and biological assets gain GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources - 3Q boost from tax credit and biological assets gain

  • 9M16’s core profit was broadly in line, making up 34% of our full-year forecasts.
  • The tax credit of US$242m and biological gains lifted reported net profit for 9M16.
  • It maintained its guidance for its FFB output to fall by 15-20% for FY16.
  • It projects CPO price to be maintained with potential upside at the end of the year.
  • Maintain Reduce with higher TP of S$0.38 (FY17 P/E of 15x) due to rollover effect.

9M16 results in line with ours but below consensus 

  • Golden Agri’s 9M16 core net profit (excluding tax benefit of US$242m, biological and forex gain) of US$36m was broadly in line, with our full-year net profit forecast at US$105m as we expect stronger 4Q earnings, but appears to be below consensus of US$216m. 
  • The group turned around to report core net profit of US$60m in 3Q16 as higher CPO price and refining margin more than offset higher depreciation charges.

Tax credit, forex and biological assets gain lift reported net profit 

  • It reported net profit of US$220m for 3Q16 and US$353m for 9M16. This was above our forecast due to net tax credit of US$111m in 3Q16 and US$242m in 9M16. 
  • We gather that Golden Agri revalued its plantation assets to take advantage of the lower 3% tax rate on revaluation gains in 2015 instead of 10%. This exercise allowed it to book substantial one-off tax income, which helped boost 9M16 net profit. 
  • The group also recognised forex gain of US$50.5m and biological gain of US$50.5m in 9M16.

Lower output dragged down plantation earnings 

  • Plantation EBITDA fell 6% and 22% yoy in 3Q16 and 9M16, respectively, as the rise in CPO price was insufficient to offset the 13% and 19% declines in FFB output in 3Q and 9M16. However, plantation EBIT rose 24% qoq due to higher output. 
  • The other drag on earnings was the rise in depreciation charges with the adoption of IAS16 and IAS41. 
  • Its downstream division posted stronger qoq earnings as refining margins benefitted from tighter processed palm products, while oilseeds reported a profit of US$16m in 3Q16.

Project FFB output to fall by 15-20% in FY16 due to El Nino 

  • The group maintained its output guidance at a 15-20% drop in FFB for 2016 and cost guidance at US$315 per tonne for 2016. It indicated that production for its estates could peak in Nov and indicated that FFB production for 4Q16 could remain as strong as 3Q.
  • For 2017, the group revealed that FFB output could recover to the 2015 level, which suggests a 15-20% rise in output. It is positive on CPO price until the end of the year.

Other key takeaways from the teleconference 

  • The group revealed that palm and laurics margin may weaken in 4Q16 and the oilseeds business remains challenging. It maintains its plans to reduce exposure to its China operations. 
  • The group also estimated that it could potentially book US$300m deferred tax benefit for FY16. Out of which, US$242m has been recognised in 9M16 and the remaining will be captured in 4Q16.

Maintain Reduce with a higher target price due to rollover effect 

  • We maintain our earnings forecasts but raise our target price (15x historical P/E) due to a rollover effect. 
  • Our Reduce call is intact due to unexciting near-term earnings prospects. 
  • A key upside risk to our call is higher-than-expected CPO prices.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2016-11-14
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.38 Up 0.350