Golden Agri-Resources - OCBC Investment 2019-08-19: More Time Needed


Golden Agri-Resources - More Time Needed

  • Net losses of US$64.7m in 2QFY19.
  • Increased contribution from downstream business.
  • B30 could arrive soon.

Performance weighed by lower CPO prices

  • Golden Agri-Resources (SGX:E5H)’s revenue fell 16.7% y-o-y to US$1.5b and net losses also widened 66% y-o-y to US$64.7m in 2QFY19. For 1HFY19, Golden Agri-Resources’ revenue declined 14% y-o-y to US$3.2b and net losses widened 71% y-o-y to US$46.4m, which is lower than ours and the street’s expectations.
  • 2QFY19 EBITDA was down 34% y-o-y to US$77m while 1HFY19 EBITDA fell 17% y-o-y to US$198m.
  • The overall weak performance was attributable to lower crude palm oil prices (CPO) which was down 22% y-o-y and lower production output which fell 6% y-o-y, partially offset by better performance of Palm, Laurics and Others.

Production to slow down

  • Golden Agri-Resources's 1HFY19 revenue from plantation and palm oil mills segment fell 16.1% to US$573.9m, mainly due to lower CPO prices, but partially offset by higher sales volume due to sell-down of inventory.
  • The fresh fruit bunch (FFB) declined 3% while palm product output fell 2% y-o-y to 4.4m tonnes and 1.3m tonnes respectively in 1HFY19. Management expects the full year FFB growth to be flat as the trees' biological cycle is now believed in the resting phrase after the bumper crop in 2018.
  • We also see the rising age profile (15% of tress are older than 25 years) in Indonesia and Malaysia which could weigh on the production. Despite Golden Agri-Resources’s continued replanting program to replant the old trees with new high-yielding trees, we believe it will take some time for the production to recover.
  • At the same time, management noted the concerns of some small holders reducing or not using fertilisers to save costs as a result of lower CPO price. This could result in lower production in 2HFY19 and FY20.

B30 could be implemented by the end of FY19

  • Separately, Golden Agri-Resources' 1HFY19 revenue from Palm, Laurics and Others declined 13.6% y-o-y to US$3.2b, dragged by lower CPO prices and lower sales volume for oilseeds in China, partially offset by the strong demand for biodiesel in Indonesia. EBITDA increased by 148.5% y-o-y to US$100.4m in 1HFY19, driven by higher contribution from biodiesel and the removal of export levy in Indonesia.
  • Management sees the full realisation of the B20 mandatory biodiesel program in Indonesia could move Indonesia to the B30 program by the end of FY19. This could potentially increase the demand from Indonesia.
  • We revised our forecasts to account for 2QFY19 weakness and lower-than-expected production output, and derived the same fair value estimate of S$0.27. We downgrade our rating from HOLD to SELL.

Chu Peng OCBC Investment Research | 2019-08-19
SGX Stock Analyst Report SELL DOWNGRADE HOLD 0.270 SAME 0.270