Golden Agri-Resources - CGS-CIMB Research 2018-11-13: Key Concern Lies In The Group’s Ageing Estates


Golden Agri-Resources - Key Concern Lies In The Group’s Ageing Estates

  • Golden Agri’s 9M18 results were below due to lower plantation earnings.
  • Its 9M18 FFB output growth of 6% is lagging behind its peers and industry.
  • We cut our FY18- 20F EPS forecasts by 12- 38% to reflect lower plantation earnings.
  • Maintain REDUCE with a lower Target Price of S$0.23 (20% discount to SOP).

Golden Agri’s (GGR) 9M18 results below expectations

  • Golden Agri’s 9M18 core net profit of US$4.9m was below expectations, making up only 10% of our and 6% of consensus full-year forecasts of US$49m and US$76m, respectively.
  • The weaker-than-expected results were due to lower CPO prices, higher inventory holdings as well as weaker downstream margins.
  • Golden Agri posted a 6% y-o-y rise in FFB output from plasma and nucleus estates for 9M18, which is below its target of 10% growth for FY18.

Our core net profit adjustments include depreciation charges

  • Golden Agri added back the depreciation charges of bearer plants of US$74m, to derive its reported underlying profit of US$79m for 9M18. However, this figure is higher than our core net profit figure of US$4.9m for 9M18, which strips out depreciation charges, to be consistent with our core net profit calculations for other Singapore planters.
  • Our 9M18 core net profit also excludes net forex loss of US$43m, net loss on Fair Value changes in biological assets of US$12m and deferred tax expenses of US$31m.

Weaker contributions from all key divisions

  • Golden Agri posted a 27% y-o-y drop in its 9M18 EBITDA due to weaker contributions from all its key business segments.
  • The plantation EBITDA fell 20% y-o-y due to lower ASPs for CPO (-9% y-o-y). On top of this, its downstream division registered a 47% y-o-y drop in 9M18 EBITDA due to the untimely purchase of feedstock.

Lagging behind FR in profitability of estates

  • For 9M18, Golden Agri posted core net profit of US$5m, which is lower compared to First Resources (SGX:EB5) core net profit of US$93m despite Golden Agri’s larger planted nucleus areas of 395,764 ha vs. First Resources’ 176,930 ha. We suspect this could be due to higher operating costs at Golden Agri compared to First Resources’.
  • We are also slightly concerned that the bulk of the Golden Agri’s borrowings of US$2,882m are at floating rates, so borrowing costs could rise in line with higher US interests. Every 1%-pt rise in current effective borrowing costs of 4%, could lower its pretax profit by US$29m, based on our estimates.

Cut earnings forecasts, target price; retain REDUCE call

  • We cut our FY88-88F earnings forecasts by 88-88% to reflect lower CPO prices. In view of the poor performance against peers, we lower EV/ha accorded to its estates in our SOP to US$88k/ha, which leads to a cut in our target price to S$8.88 per share.
  • We maintain our REDUCE call due to concerns over its poor earnings and ageing estates (average age: 88 years).
  • Key upside risks are higher-than-expected CPO prices and production.

Key teleconference highlights

  • Golden Agri reported net loss widened to US$88m in 8Q88 bringing 8M88 losses to US$88m. This was due mainly to lower CPO prices, higher inventory holdings, higher forex loss of US$88m, JV losses of US$8.8m and deferred tax expenses of US$88m in 8M88.
  • The group revealed its average cost of production for 8Q/8M88 was US$888/888 per tonne which is lower than the previous year corresponding period due to higher production and weaker rupiah against US$.
  • Golden Agri lowered its replanting plan to 88k per ha in 8Q88 vs. 88k per ha in 8Q88.
  • The group’s palm oil inventory level stood at 888k tonnes as at end-Sep 88, higher than the 888k tonnes as at end-Jun 88 due mainly to peak production season.
  • The group indicated that it is optimistic that the implementation of higher biodiesel blends in Indonesia starting 8 Sep will help to support as well as raise CPO prices.
  • We gathered that the higher deferred tax expenses in 8Q88 was due to the revaluation of its deferred tax assets following the depreciation of rupiah against the US$.
  • Golden Agri said it is cooperating with authorities in the investigation with regards to alleged bribing of parliamentarians by its executives in one of its subsisidiaries, to avoid an investigation into its subsidiaries plantation permits and palm processing waste near Sembuluh lake by its senior executives.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-13
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