Golden Agri-Resources - CGS-CIMB Research 2019-08-15: Low CPO Price Drags The Group Into The Red

GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Golden Agri-Resources - Low CPO Price Drags The Group Into The Red

Golden Agri-Resources reported 1H19 core net loss of US$56m, which we consider to be below our expectation due to weaker-than-expected plantation earnings.
Plantation EBITDA fell 51% y-o-y in 1H due to lower ASP for palm products and higher costs; this was partially offset by better downstream profit.
Maintain REDUCE and 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-RESOURCES LTD (SGX:E5H) reported a 1H19 core net loss of US$56.3m, which is significantly below our and Bloomberg consensus full-year core net profit forecasts of US$77m and US$79m, respectively. The miss was due to lower-than-expected CPO price and FFB output from its estates.
The core net loss figure differs from its reported net loss of US$46m for 1H19 as we exclude
1. an exceptional gain of US$11m,
2. a deferred tax income of US$3m,
3. an unrealised forex loss of US$2.1m; and
4. a net loss from fair value of biological assets of US$2m.

Several reasons contributed to wider core losses registered in 2Q19 of US$61.6m vs 2Q18’s losses of US$9.2m.
- Firstly, FFB output from its nucleus estates fell by 10% y-o-y in 2Q19 due mainly to weaker yields from its estates.
- Secondly, ASP achieved for its CPO products fell by 16% y-o-y to US$561 per tonne, while cost of production grew 4% y-o-y to US$313 per tonne.
- On top of these, the group had an inventory build-up of 569,000 tonnes as at end-June compared to 489,000 tonnes as at end-March 2019.
As a result, plantation EBITDA fell 65% y-o-y in 2Q19 and 41% y-o-y in 1H19. The better downstream profit was a slight consolation to help buffer the weaker plantation profit.

At the results teleconference, Golden Agri-Resources revealed it is lowering its guidance for production. It now expects FFB output from its nucleus estates to be flat vs. 2018, which is lower than its previous guidance of 5% output growth. The group said it has replanted 3,300 ha of its estates in 1H19 and it is reviewing its replanting target of 15k ha for 2019 as part of its capex spend review.
Golden Agri-Resources also explained that it has invested more than US$200m in plantation estates in Liberia (via Verdant Fund) and US$500m in a technology fund. These are captured under investments in its balance sheet.

We cut our earnings forecasts to reflect lower CPO price assumptions and FFB yields. Our SOP-based target price stays at S$0.23. We expect Golden Agri-Resources to post better earnings in 2H19 due to seasonally higher production.
We keep to our REDUCE call due to concerns over its earnings trailing behind those reported by its industry peers, ageing estates (average age: 17 years) and potential impairment on its investments in oil palm estates in Liberia.
Key upside risks are higher-than-expected CPO prices and production.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-15

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