Golden Agri-Resources (GAR) reported its 2Q14 results last evening, which surprised on the downside. 1H revenue rose 27% to US$3953.0m, meeting 57% of our FY14 forecast, while reported net profit slipped 17% to US$131.1m; we estimate core earnings (excluding forex) would have fallen 10% to US$149.6m, meeting just 39% of our full-year estimate. Given the poor results, we pare our FY14F earnings by 17%, which results in our fair value easing from S$0.55 to S$0.50 (still based on 13.5x blended FY14/FY15F EPS). We downgrade our rating to SELL.
2Q earnings hit by China operations
Golden Agri-Resources (GAR) reported its 2Q14 results last evening, which surprised on the downside. While revenue grew 21% YoY to US$2038.8m, aided by a firmer CPO price as well as higher CPO production and sales volumes, reported net profit slipped 40% to US$27.3m; this following a wider-than-expected loss of US$40m from its Oilseeds operation (mainly due to the negative crush margins in China), as well as continued refining margin pressures in Indonesia. Even if we add back the forex loss of US$21.7m, core earnings would fallen 17% to ~US$49.0m. 1H revenue rose 27% to US$3953.0m, meeting 57% of our FY14 forecast, while reported net profit slipped 17% to US$131.1m; we estimate core earnings (excluding forex) would have fallen 10% to US$149.6m, meeting just 39% of our full-year estimate.
No quick fix to issues yet
Regarding the negative crush margins in China, management reveals that it is actively looking for solutions, which not only involves strategic sourcing opportunities but also the possibility of temporarily shutting down the plant to reduce the losses. As for the weak refining margins in Indonesia (EBITDA margin of just 1% in 1H14), management believes that the situation should improve with the "less tight" supply of CPO. However, GAR notes that the pressure is still likely to remain, given that most refiners have built capacity for the next five years.
Mostly upbeat about longer-term prospects
Going forward, GAR remains mostly upbeat about the long-term outlook for the palm oil industry. It has also kept its capex spending at US$550m, with US$250m for upstream growth and US$300m for downstream growth. However, it did note that the Oilseed industry in China remains challenging and it will review its business model and explore strategic alternatives.
Near-term SELL pressure likely
Given the poor results, we pare our FY14F earnings by 17%, which results in our fair value easing from S$0.55 to S$0.50 (still based on 13.5x blended FY14/FY15F EPS). We downgrade our rating to SELL.
Golden Agri-Resources (GAR) reported its 2Q14 results last evening, which surprised on the downside. While revenue grew 21% YoY to US$2038.8m, aided by a firmer CPO price as well as higher CPO production and sales volumes, reported net profit slipped 40% to US$27.3m; this following a wider-than-expected loss of US$40m from its Oilseeds operation (mainly due to the negative crush margins in China), as well as continued refining margin pressures in Indonesia. Even if we add back the forex loss of US$21.7m, core earnings would fallen 17% to ~US$49.0m. 1H revenue rose 27% to US$3953.0m, meeting 57% of our FY14 forecast, while reported net profit slipped 17% to US$131.1m; we estimate core earnings (excluding forex) would have fallen 10% to US$149.6m, meeting just 39% of our full-year estimate.
No quick fix to issues yet
Regarding the negative crush margins in China, management reveals that it is actively looking for solutions, which not only involves strategic sourcing opportunities but also the possibility of temporarily shutting down the plant to reduce the losses. As for the weak refining margins in Indonesia (EBITDA margin of just 1% in 1H14), management believes that the situation should improve with the "less tight" supply of CPO. However, GAR notes that the pressure is still likely to remain, given that most refiners have built capacity for the next five years.
Mostly upbeat about longer-term prospects
Going forward, GAR remains mostly upbeat about the long-term outlook for the palm oil industry. It has also kept its capex spending at US$550m, with US$250m for upstream growth and US$300m for downstream growth. However, it did note that the Oilseed industry in China remains challenging and it will review its business model and explore strategic alternatives.
Near-term SELL pressure likely
Given the poor results, we pare our FY14F earnings by 17%, which results in our fair value easing from S$0.55 to S$0.50 (still based on 13.5x blended FY14/FY15F EPS). We downgrade our rating to SELL.
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