Golden Agri-Resources - UOB Kay Hian 2019-10-15: 2H19 Could See A Recovery But Not Good Enough

GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Golden Agri-Resources - 2H19 Could See A Recovery But Not Good Enough

Key takeaways from the conference were largely in line with Golden Agri-Resources's guidance given during the 2Q19 results briefing, ie expecting a better 2H19 on higher h-o-h FFB production in 2H19 (1H19: -3.1% y-o-y), flat y-o-y production in 2019 and better ASP. However, our concern is that production in 2H19 may not be able to increase y-o-y due to an older age profile and the recent dry weather.
Maintain SELL. Target price: S$0.16.

The average age for trees at GOLDEN AGRI-RESOURCES (SGX:E5H) is 17 years. Management targets to replant 10,000-15,000ha in 2019 with newer-generation higher-yielding seeds and plans to accelerate replanting in the coming years. The replanting cost (up to maturity) is about US$4,000/ha.
In 1H19, Golden Agri-Resources replanted only 3,300ha. Given the dry weather in 3Q19, Golden Agri-Resources might not be able to achieve its replanting target on time.

Golden Agri-Resources has focused on mechanisation and innovation to improve productivity and reduce labour cost. Management guided that the group is able to reduce about 10% of total cash cost via mechanisation (mostly in logistics and harvesting). Golden Agri-Resources guided cash cost at US$300/tonne.

Golden Agri-Resources is a major biodiesel player in Indonesia and has secured a total allocation of 509,331kl (previously: 486,975 kl) for 2019 after the revision by the Ministry of Energy & Mineral Resources. Management had guided that the implementation of B30 biodiesel will kick in latest by Jan 20.
We reckon that the biodiesel allocation will continue to contribute positively to Golden Agri-Resources’s earnings. With the implement of B30 biodiesel blending by 2020, Golden Agri-Resources’s biodiesel operation could be running at full utilisation (current utilisation rate at 80-90%) and Golden Agri-Resources is likely to expand its biodiesel capacity.

Golden Agri-Resources’s debt remains elevated with a net gearing ratio at 0.65x. Management’s wish to lower the debt has been hampered by weak CPO prices. With Indonesia’s central bank cutting its key interest rate, we opine that management might take this opportunity to refinance its debt. Management had guided that the current debt level is still manageable.

Golden Agri-Resources has an older tree age profile at an average age of 17 years, of which 48% are more than 19 years old. After two consecutive years of high FFB production growth, oil palm trees are under stress. Management guided flat production growth for 2019 and said that FFB production growth would at best be 5% y-o-y going forward.
We are expecting flattish FFB production growth for the next two years.

Golden Agri-Resources had invested US$220m in Golden Veroluem, which invested in an oil palm plantation in Liberia in 2012. Management guided it might need to write off the Liberia investment. Recently, Sime Darby Plantation and Kuala Lumpur Kepong had also impaired their Liberia estates.

We maintain our net profit forecasts at US$56m, US$118m and US$155m for 2019-21 respectively.

Maintain SELL with a target price of S$0.16, pegged at 13x 2020F PE, or -1SD of the stock’s five-year mean. Golden Agri-Resources’s more mature plantation estates limit its production growth prospects and amid more volatile downstream operation. See Golden Agri-Resources share price; Golden Agri-Resources dividend history.

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-10-15

SGX Stock Analyst Report SELL MAINTAIN SELL 0.160 SAME 0.160