Golden Agri-Resources - CGS-CIMB Research 2019-02-27: 4Q18 Swings To Core Losses Due To Low CPO Price


Golden Agri-Resources - 4Q18 Swings To Core Losses Due To Low CPO Price

  • Golden Agri-Resources recorded FY18 core net loss of US$48.3m, against our net profit forecast of US$30.4m and Bloomberg consensus forecast of US$39.5m.
  • The key variance came from lower-than-expected downstream margin, higher losses from associates and lower CPO price achieved.
  • Maintain REDUCE with Target Price of S$0.23 (10% discount to SOP).
  • Our key concerns are weak earnings delivery, ageing estates and exposure to Liberia.

Golden Agri’s (GGR) final results below expectations

  • GOLDEN AGRI-RESOURCES LTD (SGX:E5H) reported a final core net loss of US$48.3m, significantly below our and consensus core net profit projections of US$30.4m and US$39.5m, respectively.
  • The weaker-than-expected results were due to lower downstream margins, weaker-than-expected CPO prices and larger share of losses from joint ventures of US$40m in FY18.

Why our core earnings differed from Golden Agri’s underlying profit

  • Golden Agri-Resources added back the depreciation charges of bearer plants of US$25m/US$98m for 4Q18/FY18 and included gains from changes in fair value of its unquoted securities of US$131.5m in 4Q18 and FY18, to arrive at its reported underlying profit of US$101m/US$181m for 4Q18/FY18. However, this figure is higher than our core net loss figure of US$53m/US$48m for 4Q18/FY18, which strips out depreciation charges and changes in fair value of its unquoted securities, to be consistent with our core net profit calculations for other Singapore planters.
  • Our FY18 core net profit also excludes net forex loss of US$19m, net loss on Fair Value changes in biological assets of US$15m and deferred tax expenses of US$50m.

Lower CPO price and downstream margins led to weak EBITDA

  • Golden Agri-Resources posted a 14% y-o-y drop in its FY18 EBITDA due to weaker contributions from all its key business segments. Plantation EBITDA fell 22% y-o-y due to lower ASPs for CPO (- 14% y-o-y). Its downstream division registered an 11% y-o-y rise in FY18 EBITDA to US$184m as it booked a US$100m fair value gain on unquoted securities in 4Q18.
  • We gathered that most of the gain in fair value was derived from its investments in wind farms, which is likely to be a one-off, as the group plans to revalue these financial assets on an annual basis and recognised the gain/loss on the P&L, in line with IFRS 9.

Maintain REDUCE with an unchanged target price of S$0.23

  • We fine-tune our earnings forecasts by less than 1% due to housekeeping issues but maintain our SOP-based target price of S$0.23.
  • We maintain our REDUCE call due to concerns over its poor earnings which trailed behind earnings reported by its industry peers, ageing estates (average age: 16 years) and potential impairment on its investment in oil palm estates in Liberia.
  • We gathered that the group has invested around US$400m (including debts) in Liberia, where it currently owns around 18,000 ha of planted oil palm estates.
  • Key upside risks are higher-than-expected CPO prices and production.

Key teleconference highlights

  • Golden Agri-Resources reported net profit of US$79m in 4Q18 which helped to narrow FY18 net loss to US$1.77m from US$81m net loss in 9M18.
  • The strong 4Q reported net profit was due mainly to a US$131.5m gain arising from changes in fair value of its financial assets, in line with higher fair market valuation. The group explained that it adopted IFRS9 at the start of the year, where all financial assets, particularly unquoted securities, are required to be stated at fair value instead of costs.
  • The fair value was mainly based on external valuation reports. We gathered that the key investments that led to the gain in fair value mainly came from the revaluation gain from its investments in wind farms in Italy. Golden Agri-Resources booked US$100m of the fair value gain under the downstream segment and the remaining US$31.5m was included in upstream division profit.
  • Stripping out the gain from changes in fair value of its financial assets, we deduced that the group posted a core net loss of US$48m in FY18. This was below our forecasts due mainly to lower-than-expected profit margin from its downstream division, higher-than-expected joint venture losses of US$40m and lower plantation profit due to weaker CPO prices.
  • We gathered that the joint venture losses were due to its 50% investment in Sinar Mas Cepsa, which owns an oleochemical plant in Dumai, Sumatra to produce fatty alcohol and acids from sustainably-sourced palm kernel oil for the Asian, Eastern and Western European markets. Golden Agri-Resources said that the losses were because the plant is still in the market development phase of securing demand for the products from this plant. The investment for the plant is around S$484m (US$372m).
  • Golden Agri-Resources revealed its average cost of production for 4Q/FY18 was US$280/286 per tonne which is lower than the US$309/US$299 per tonne for 4Q17/FY17 due to higher production and weaker rupiah against US$. Golden Agri-Resources indicated that its cost of production is likely to rise in FY19F due to a 15% y-o-y rise in fertiliser prices and 10% y-o-y increase in minimum wage. However, it expects average cost of production for CPO to stay below US$300 per tonne due to higher FFB output. The group is targeting FFB output growth of 4% in FY19F, slower than 8% output growth registered in FY18.
  • Golden Agri-Resources completed the replanting of 10,500 ha of estates in FY18 and targets to replant 15,000 ha in FY19F.
  • The group’s palm oil inventory level stood at 547k tonnes as at end-Dec 18, lower than the 680k tonnes as at end-Sep 18.
  • It is optimistic that Indonesia’s growing biodiesel mandate will serve as a catalyst to the industry. The group revealed that its biodiesel plant registered US$14m-15m EBITDA in FY18.
  • In terms of capex, Golden Agri-Resources is targeting to spend US$150m on its upstream business to replant old estates and expand its mill capacities. It is allocating another US$100m for downstream assets investment.

Ivy NG Lee Fang CFA CGS-CIMB Research | 2019-02-27
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