Golden Agri-Resources - OCBC Investment 2017-08-15: Downside Risks Remain For CPO Prices

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GOLDEN AGRI-RESOURCES LTD E5H.SI

Golden Agri-Resources - Downside Risks Remain For CPO Prices

• 1H17 EBITDA up 44%.
• Better underlying profit.
• Bearish on CPO prices.

Better core results 

• Golden Agri-Resources reported its 2Q17 results yesterday evening, with revenue up 0.8% YoY to US$1.76b, while reported PATMI was 45% lower to US$21.9m. 
• Excluding non-operating items including deferred tax income, underlying PATMI improved from a loss of US$6.4m in 2Q16 to a net profit of US$53.5m. 
• EBITDA, which also excludes changes in fair value and FX, was up 69% to US$145.5m. 1H17 revenue was up 18% to US$3.8b, meeting 50% of our FY17F estimates, on firm CPO prices and higher palm production.
• While underlying profit improved by 220%, reported PATMI was down 56% to US$59.4m mainly due to the recognition of deferred tax income in 2Q16, and formed ~30% of ours and consensus full year estimates, which we deem to be somewhat short of expectations.

Strong production recovery 

• 1H revenue from Plantations segment grew 41% YoY to US$843m, and EBITDA was up 64% to US$244m on the back of strong production yield and better CPO prices. 
• Management now expects FY17 production closer to ~20% growth along with largely steady prices at current levels. 
• Cost of production should remain at around US$300 for the year on the back of strong production. In efforts to reduce its age profile, GAR expects to replant ~10k ha this year. 
• Further into 2018, we expect some acceleration in replanting with the new super high-yielding planting materials ‘Eka 1’ and ‘Eka 2’.

Downside risks lurking for CPO price 

• We understand that management believes demand and restocking by key markets including China and India could help to support CPO price at around US$600-700/MT. With that said, OCBC Treasury Research remains bearish on CPO prices, estimating year-end CPO price at MYR 2,250/MT, given
  1. higher CPO production in 2017,
  2. sustained low oil prices to-date and
  3. healthy global alternative oilseed production weighing on overall oilseed prices. 
• In addition, biodiesel demand is expected to be softer. 
• In consideration of the outlook, we have revised our estimates and rolling forward to 16x FY18F P/E, we are keeping our HOLD and a slightly lower fair value estimate of S$0.36 (previous: S$0.38)

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2017-08-15

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.360 Down 0.380