Golden Agri-Resources (GGR SP) - UOB Kay Hian 2018-05-16: 1Q18 Below Expectation On Weaker Palm And Laurics Margins

Golden Agri-Resources (GGR SP) - UOB Kay Hian 2018-05-16: 1q18: Below Expectation On Weaker Palm And Laurics Margins GOLDEN AGRI-RESOURCES LTD SGX: E5H

Golden Agri-Resources (GGR SP) - 1Q18: Below Expectation On Weaker Palm And Laurics Margins

  • Golden Agri-Resources (GGR)’s 1Q18 results came in below our expectation due to weaker-than-expected palm and laurics margins. The weaker overall q-o-q and y-o-y results were mainly due to lower FFB production and CPO ASP.
  • We cut our net profit forecasts by 22%, 28% and 29% respectively for 2018-20 to factor in lower EBITDA margins from the palm and laurics segment as our earlier estimates were too optimistic.
  • Downgrade to SELL with a lower target price of S$0.26 post cut in earnings.



RESULTS

  • Results below expectations. Golden Agri-Resources (GGR) reported a core net profit of US$25m in 1Q18 (-33.0% q-o-q, -70.5% y-o-y), underperforming our expectation. The negative variance mainly came from a weaker-than-expected palm and laurics margin. Revenue and sales volume from all other segments came in within expectations.
  • Plantation and palm oil mills segment: Weaker q-o-q and y-o-y. Segmental EBITDA was weaker q-o-q and y-o-y in 1Q18 mainly due to lower FFB production (-7.3% q-o-q, -13.3% y-o-y) and a weaker CPO ASP. The weaker q-o-q FFB production was mainly due to seasonality as 1Q is usually the weakest quarter for GGR. Meanwhile, the weaker y-o-y FFB production was attributable to unusually high production in 1Q17 with GGR recovering from the El Nino’s impact.
  • Palm and laurics: EBITDA declined qoq and yoy in 1Q18 due to a weaker margin of 1.6% in 1Q18 (4Q17: 2.2%, 1Q17: 2.1%). The weaker margin was due to CPO prices being affected by the export tax suspension in Malaysia and import tax increase in India.
  • Oilseeds and others: Improved qoq but flat yoy in 1Q18. EBITDA improved q-o-q due to better margins despite lower sales volumes. On a y-o-y basis, EBITDA was flat as the better margins were offset by weaker sales volumes.


STOCK IMPACT

  • Management expects FFB production growth of 8-10% y-o-y for 2018. Despite negative FFB production y-o-y growth in 1Q18, we maintain our FFB production growth forecast of 9.6% y-o-y which is in line with management guidance of 8-10% y-o-y as we expect FFB production to pick-up in 2H18. FFB production growth in 2018 would mainly be supported by yield improvement, while FFB production from new mature areas will be offset by losses in production due to replanting activities. The FFB production ratio for 1H18:2H18 is expected to be at 40-45%:55-60% (vs 2017’s production ratio of 49%:51%).
  • Higher biodiesel allocation for GGR. In the sixth biodiesel announcement (for the period of May 18-Oct 18), total biodiesel allocations for GGR was at 112,597 kiloliters (kl), 3.9% higher hoh and 11% higher y-o-y. We expect the biodiesel allocations will continue to contribute positively to GGR’s earnings.
  • Indonesia’s biodiesel production volume target at 3.5m-4.0m kl for 2018. We gather that biodiesel consumption (PSO and non-PSO) in 2018 could increase to 3.5m-4.0m kl (from 2.8m-3.0m kl in 2017). The narrowing gap between gasoil and crude oil prices has made the biodiesel programme more viable.
  • Biodiesel exports to increase. Indonesia’s biodiesel exports could increase after EU eliminates anti-dumping duties on biodiesel. GGR exports only raw CPO to the EU currently and does not export palm oil-based biodiesel at this juncture. Any increase in biodiesel imports from the EU could benefit GGR. Do note that currently, GGR’s biodiesel capacity only caters to domestic biodiesel production and not export demand.
  • US-China trade war could be positive to crushing margins in the short term. We understand that a surge in soymeal price in China due to the US-China trade war could be positive to soybean crushing margins in the short-term and this would be positive to GGR’s oilseeds segment. GGR’s mid- to long-term soybean crushing margins will be subject to animal feed demand. 
  • Management indicated that a decrease in soybean crushing volumes will reduce the availability of soyoil in the Chinese market and in turn be positive to palm oil. The palm oil upstream segment contributed 80% of GGR’s EBITDA. Thus, an increase in palm oil demand is positive to GGR.


EARNINGS REVISION/RISK

  • Cut net profit forecasts. We cut our 2018-20 net profit forecasts by 22%, 28% and 29% respectively to factor in potentially lower palm and laurics segment EBITDA margins as our earlier estimates were too optimistic. We are expecting palm and laurics EBITDA margins of 2.3%, 2.4% and 2.5% respectively for 2018-20 (from previous forecasts of 2.8%, 3.0% and 3.1% for 2018-20).
  • We are expecting EPS of 1.3 US cents, 1.7 US cents and 1.7 US cents for 2018-20 respectively.


VALUATION/RECOMMENDATION

  • Downgrade to SELL (from HOLD) with a lower target price of S$0.26 (from S$0.31) post earnings adjustment. 
  • Our target price is pegged to 14x 2018F PE or -1SD of its five- year mean PE, in-line with sector peers’ valuations (ascribed PE of -1SD of 5-year mean) due to the weak CPO price outlook in 2018.


SHARE PRICE CATALYST

  • Better-than-expected FFB production growth.





Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-16
SGX Stock Analyst Report SELL Downgrade HOLD 0.26 Down 0.310



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