Golden Agri-Resources (GGR SP) - UOB Kay Hian 2017-08-15: 2Q17 Results Within Expectations

GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources (GGR SP) - 2Q17 Results Within Expectations

Golden Agri-Resources (GGR) reported a 1H17 core net profit of US$137m, which is in line with our expectation. FFB production surpassed 1H15’s level, suggesting the lagged impact from the severe drought is weakening.
With the higher CPO ASP yoy, 1H17 core net profit increased over 100%. However, 2Q17 earnings were weaker qoq mainly due to lower production from the plantation division and the oilseeds division’s weaker margin.

Golden Agri’s (GGR) 2Q17 core net profit of US$53m and 1H17 core net profit of US$137m were in line with our forecasts.
1H17 core net profit accounted 48% of our full-year estimates. We are expecting a better performance in 2H17 on the back of higher production and stable CPO prices.
2H17 production growth is expected to be lower than 1H17’s given 2H16’s higher base vs 1H16.

The plantation division’s earnings were impacted by lower sales volume (-17.2% qoq).
Meanwhile, the oilseeds division’s EBITDA fell 7.7% qoq due to a weaker margin of US$6.5/tonne in 2Q17 vs US$7.2/tonne in 1Q17.

The plantation division improved yoy in 2Q17 and 1H17, mainly supported by higher FFB production and CPO ASP.
Meanwhile, palm & lauric EBITDA increased yoy, mainly supported by a better margin despite lower sales volume.
For the oilseeds division, the better earnings yoy was thanks to margin turnaround.

For 1H17, FFB nucleus production was 3.7m tonnes, higher than 1H15’s FFB production of 3.5 m tonnes, and accounts for 48% of our full-year estimates.
Meanwhile, FFB yield for 1H17 at 9.8 tonnes/ha was almost on par with 1H15’s 9.9 tonne/ha. This indicates that trees are now less stressed and recovering from the lagged impact of severe drought.

Management maintains production growth guidance of 15-20% yoy for 2017, and reckons that growth would likely hit the higher end of the guidance. We maintain our FFB production growth forecast of 12% yoy for 2017, which is lower than management’s guidance. Every 5ppt increase in FFB production growth will increase our 2017 net profit forecast by 8%.
Targets to replant about 10,000ha for 2017, with about 1,900ha replanted to date. Replanting efforts are likely to accelerate given that about 10% of its trees are above 25 years old. Replanting with the new seeds should give better oil yield.
Downstream margins of 2-3% are sustainable for 2017. 2H17 could see marginal improvement as forward pricing is better now.
Biodiesel delivery is behind schedule. Other players are facing a similar situation as well. Current utilisation rate is about 33%.

Maintain net profit forecasts. We are expecting EPS of 2.2 US cents, 2.2 US cents and 2.6 US cents for 2017-19 respectively.

Maintain HOLD and target price of S$0.34, pegged at 13x 2018F PE, in line with Singapore plantation companies’ mean PE. Entry price is S$0.30.
We reckon that current prices have already factored in the higher production and earnings expected for 2H17.
In the meantime, there are rising concerns on the potential CPO price weakness going into 2018 with another round of higher palm oil production and bumper soybean crops to come.

Better-than-expected CPO prices. 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.

Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-15

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