Golden Agri-Resources (GGR SP) - UOB Kay Hian 2017-02-27: 4Q16 Below Expectations, Downstream Underperforms

GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources (GGR SP) - 4Q16 Below Expectations, Downstream Underperforms

Golden Agri-Resources (GGR)’s 4Q16 results were below expectations mainly as the plantation and palm & lauric divisions underperformed.
For 2017, we expect FFB production growth at 12% yoy, which is below management’s guidance as we see production recovery to be weaker than expected due to the older age profile.
We raise our 2017-18 net profit forecasts by 4% and 6% respectively, and introduce 2019F EPS of 2.6 US cents.

Golden Agri-Resources (GGR) reported a net profit of US$46.3m in 4Q16, down 78.9% qoq (4Q15: net loss of US$88.4m). Excluding one-off non-operating items and deferred tax income, core net profits were US$62.4m (+0.8% qoq, +>100% yoy) in 4Q16 and US$57.2m (-74.1% yoy) in 2016.
The results were below our expectations. The negative variance was mainly due to underperformance in the plantation and palm & lauric divisions. The palm & lauric division’s EBITDA margin fell to 2.5% in 4Q16 from 3.7% in 3Q16.
GGR proposed a dividend of 0.635 S cents (2015: 0.502 S cents), translating into a yield of 1.6%.

EBITDA improved qoq in 4Q16, mainly supported by higher FFB production qoq (+38.8% qoq). For 2016, EBITDA fell 8.7% yoy as production was affected by lagged impact from the drought.

EBITDA jumped yoy in 2016 on better margins. EBITDA margin improved to 2.9% in 2016 (2015: 1.9%), mainly due to the integrated business model which increases operating efficiency.
Going into 2017, management is confident of maintaining EBITDA margins of at least 3% as the integrated downstream operation could lead to higher efficiency and cost savings.
Meanwhile, refining margin is expected to stay flat in 1Q17 as CPO supply is still relatively tight.

EBITDA dipped into negative US$6.3m in 4Q16 vs profits of US$9.6m in 3Q16 and US$1.7m in 4Q15, mainly due to less favourable market conditions in China.
For 2016, EBITDA dropped 10% yoy despite higher revenue mainly due to higher operating cost. EBITDA margin was squeezed to 1.3% in 2016 (2015: 1.8%).
We understand the overall operating environment in China remains challenging, especially for small players like GGR. Thus, we reckon its 2017performance will remain lacklustre.

GGR reported a net tax credit of US$304m in 2016, arising from from the increase in the tax depreciable value of its plantation assets. Management says there will be no deferred tax credit recognition in 2017.

We raise our FFB production growth to 12% yoy (7% previously) for 2017, which is lower than management’s guidance of 15- 20% yoy.
We are more conservative as the production recovery may not be as strong as expected as more than 38% of GGR’s nucleus planted areas are 19-25 years old. We understand old trees take a longer time to recover.

Raise net profit forecasts. We increase our 2017-18 net profit forecasts by 4% and 6% respectively on higher FFB production growth forecasts. Meanwhile, we introduce 2019F net profit of 2.5 US cents assuming FFB production growth of 9% and CPO price of RM2,500/tonne (2018F: RM2,500/tonne).
We are expecting EPS of 2.2 US cents, 2.2 US cents and 2.6 US cents for 2017-19 respectively.

Maintain HOLD with a higher target price of S$0.45 (up from S$0.42), pegged at 15x 2017F PE, its five-year average, and in line with Singapore peers’ valuations. Entry price is S$0.38.

Better-than-expected CPO prices. As one of the largest upstream players in the sector, GGR has the highest leverage to CPO prices.
Better-than-expected performance from its Chinese soybean crushing operations.

Ooi Mong Huey UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-27

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.45 Up 0.420