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.

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.

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.

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.

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.

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.

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

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