Golden Agri-Resources - CGS-CIMB Research 2020-05-14: Why 1Q Did Not Gain From Higher CPO Price


Golden Agri-Resources - Why 1Q Did Not Gain From Higher CPO Price

  • Golden Agri Resources’s 1Q20 core net loss of US$54m was below, vs. our/consensus FY20F core net profit forecast of US$62m/US$63m, due to weak downstream profit.
  • We gather that this was because it bought CPO inventories in anticipation of a supply shortfall and did not expect Covid-19 disruptions to affect demand.
  • Downgrade to REDUCE from Hold due to concerns over weak results, potential write-down in value of its investments and ageing estates.

Golden Agri Resources's 1Q20 results below due to weak downstream contributions

  • Golden Agri Resources (SGX:E5H)’s core net loss of US$54m in 1Q20 is below, vs. our/consensus FY20F core net profit forecast of US$62m/US$63m. This is a disappointment as we had been expecting Golden Agri Resources to benefit from higher CPO prices in 1Q20.
  • Golden Agri Resources’s 1Q20 core net loss widened to US$54m, from a US$41m core net profit in 4Q19 and US$13m core net loss in 1QFY19. We gather that this was because its downstream division was barely EBITDA positive in 1Q20, against 4Q19’s US$94m EBITDA (ex. Fair Value gain on financial assets) and 1Q18’s US$59m.

Explaining the weak downstream performances

  • In its 1Q20 performance update, the group said that its downstream business was impacted by higher input prices due to severe supply chain disruptions. We gather that this is partly because Golden Agri Resources’s downstream was stocking up on CPO (its key raw material) in anticipation of a price rally in 1Q20 on tight supply.
  • However, it was caught by the Covid-19 outbreak, which led to demand disruption in its key destination markets, such as China and India, due to various restricted movement orders. This had affected their ability to sell its CPO inventory.
  • To make matters worse, CPO prices fell significantly from its 1Q20 peak of RM3,111/tonne to RM2,096/tonne by end-Mar, due to demand destruction from the restricted movement controls. This has led to losses in the group’s inventory values.
  • For perspective, Golden Agri Resources’s downstream sales volume of 2.3m tonnes in 1Q20 is 3.8x more than its upstream palm product sales volume of 0.615m tonnes.

Higher CPO price offset lower FFB output in 1Q20

  • During the results teleconference, we gather that the upstream benefitted from better CPO prices, but this was offset by lower FFB output (-5% y-o-y) from its nucleus estates. The group maintains its target for FFB output from its nucleus estates, which is flat y-o-y, with production to pick up only in 2H20.

Downgrade to REDUCE from HOLD; cut Target Price to S$0.117

Ivy NG Lee Fang CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-14
SGX Stock Analyst Report REDUCE MAINTAIN HOLD 0.117 DOWN 0.210