Golden Agri-Resources

OCBC on 13 Aug 2015

Golden Agri-Resources (GAR) reported 2Q15 revenue slipping 10.2% YoY to US$1831.1m; but it rebounded 17.9% QoQ as CPO production improved; net profit came in at US$38.8m, +42.2% YoY and +125.5% QoQ. As such, 1H15 revenue, though down 14.4% at US$3384.4m, it met 50% of our FY15 forecast; net profit tumbled 57.3% to US$55.9m, but still met 46% of our full-year estimate. While we are leaving our estimates unchanged for now, we are lowering our valuation peg from 13.5x to 12.5x to reflect the lower market PER; and this in turn lowers our fair value from S$0.35 to S$0.325. We are also upgrading our call from Sell to HOLD as most of the negative news should have been captured in the correction from S$0.45 to S$0.295.

2H15 outlook continue to remain challenging
But going forward, management expects the overall environment to remain challenging, even though 2H tends to be the slightly better half, given the volatility in CPO prices, climatic conditions and fluctuating exchange rates. Still, management intends to focus on enhancing its integrated operation capabilities to capture profit opportunities across the value chain. For 2015, it intends to spend US$130m of capex on upstream for replanting purposes; and US$170m on downstream to extend product portfolio, distribution coverage and global market reach.

More clarity on bio-asset accounting treatment
Separately, GAR gave more clarity on the new accounting treatment for biological assets that will be effective on 1 Jan 2016. GAR said it will opt for valuing bearer plants back to historical cost and be included as fixed assets to be depreciated over their useful life (15 years in this case). Based on the pro-forma impact, FY14 plantation assets would be adjusted down from US$7902m to US$1138m; equity down from US$8729m to US$3706m; core net profit will dip from US$221m to US$144 (mainly due to higher depreciation). However, do note that the impact is non-cash in nature; and would also bring book value back to a more reasonable level. 

Upgrade to HOLD with S$0.325 fair value
While we are leaving our estimates unchanged for now, we are lowering our valuation peg from 13.5x to 12.5x to reflect the lower market PER; and this in turn lowers our fair value from S$0.35 to S$0.325. We are also upgrading our call from Sell to HOLD as most of the negative news should have been captured in the correction from S$0.45 to S$0.295.

Golden Agri-Resources

OCBC on 17 June 2015

Golden Agri-Resources (GAR) could continue to see a somewhat muted near-term outlook; this as the recent rally in CPO (crude palm oil) prices is expected to run out of steam, damped by falling demand for palm oil after Ramadan and also higher production as the industry heads into the peak production period. Furthermore, with the prices of substitute vegetable oils like corn and soy likely to fall further in the coming months due to oversupplied conditions, we fear that this could also weigh on substitution demand for palm oil. Having said that, current El Nino phenomenon is expected to bring much drier conditions to Indonesia, which could affect CPO production. Still, experts believe that any impact is likely to come later (probably end 2015 or early 2016). As such, we maintain our SELL rating on GGR with an unchanged S$0.35 fair value (based on 13.5x FY15F EPS).

CPO price rally seen fizzling out
According to a Reuters report, the recent rally in CPO (crude palm oil) prices to a 3-month high could be running out of steam and has stubbornly stayed below this year’s peak of MYR2400/ton (hit in early Mar); this as the buying ahead of the Muslim festival of Ramadan peters out and the industry heads into the peak production period. But we also noticed that the USD has appreciated 6% against the MYR since end Apr. Another reason we note could be due to the continued softening in the prices of substitute vegetable oils like soy and corn, no thanks to the bumper harvests in the US and South America. 

Brazil corn crop could worsen market glut
In a separate Bloomberg report, the upcoming corn harvest from Brazil is expected to be bigger than ever, where market watchers believe it could flood an already oversupplied global corn market and depress prices further. We note that the corn futures are back to near 5-year lows (corn prices have slumped 24% in the past year). Meanwhile, the price differential between soy and CPO prices has also narrowed significantly to below US$300/ton, thus reducing the substitute demand for CPO. And as long as the differential stays below the near-15 year average of US$376/ton, it could continue to weigh on CPO demand.

El Nino effects are more pronounced this year
Having said that, much drier conditions are expected with the coming of the El Nino phenomenon in Indonesia, with some experts even saying the effects could last well into 2016. While some plantation stocks have run up on this news, any impact on production is likely to come later; this as it usually takes as long as 6-9 months for the tree stress to show up. Hence, we believe that unless we see a strong recovery in demand, the near-term outlook for Golden Agri-Resources (GAR) remains somewhat muted. As such, we maintain our SELL rating on the stock with an unchanged fair value of S$0.35 (still based on 13.5x FY15F EPS).

Golden Agri-Resources

OCBC on 13 May 2015

Golden Agri-Resources (GAR) reported a very weak set of 1Q15 results, with revenue down 19% YoY at US$1553.3m and reported net profit slipping 83.5% to just US$17.2m; core earnings of US$52.1m (down 48.2%) met only 18.3% of our previous full-year forecast. But management highlighted that there were good sequential improvements, with core earnings actually +13% QoQ even though revenue slipped 15%. Although GAR remains confident of the longer term demand growth for CPO, the near-term outlook is still quite challenging, given the still-sluggish CPO demand (also likely damped by ample supply of substitute vegetable oils). As we see the need to par our FY15 and FY16 estimates further, our fair value slips from S$0.42 to S$0.35, although still based on 13.5x FY15F EPS. Downgrade to SELL.

Core NPAT down 48% 
Golden Agri-Resources (GAR) reported a very weak set of 1Q15 results. Due to lower CPO production as well as soft CPO prices, GAR saw a 19% YoY slide in revenue to US$1553.3m, meeting just 21% of our original FY15 forecast. Also hit by a large forex loss of US$35.0m, reported net profit slipped 83.5% to just US$17.2m; core earnings slipped 48.2% to US$52.1m, meeting only 18.3% of our previous full-year forecast. But management highlighted that there were good sequential improvements, with core earnings actually +13% QoQ even though revenue slipped 15%. 

China situation improving but not out of the woods
By segments, the Oilseed business continued to recover in !Q15, aided by improved business conditions in the Chinese crushing industry; however GAR expects the environment there to remain challenging and it is reviewing its business model and strategy for its China oilseeds business. Separately, Plantations and Palm Oil Mills recorded a 32% YoY fall in revenue and a 41% plunge in EBITDA in 1Q15, mostly due to sharply lower ASPs and to some degree, lower CPO output due to dry weather conditions experienced in certain parts of Indonesia. While management remains upbeat that production should pick up in 2H15, it notes that the overall industry could face adverse weather impact brought on by El Nino in the coming months. However, GAR notes that there is a still a chance that higher CPO prices could mitigate the effect of lower production volumes. 

Downgrade to SELL with lower S$0.35 FV
Although GAR remains confident of the longer term demand growth for CPO, the near-term outlook is still quite challenging, given the still-sluggish CPO demand (also likely damped by ample supply of substitute vegetable oils). As we see the need to par our FY15 and FY16 estimates further, our fair value slips from S$0.42 to S$0.35, although still based on 13.5x FY15F EPS. Downgrade to SELL.

Golden Agri-Resources

OCBC on 2 Mar 2015

Golden Agri-Resources (GAR) reported a pretty weak set of FY14 earnings as expected. Going forward, management expects near-term volatility to remain, especially for its oilseeds business in China. However, management is reviewing its strategy there to improve operating efficiency. Still, GAR remains positive about the long-term prospects of the palm oil industry. It aims to spend US$130m for upstream operations and US$170m to expand its downstream business. While we do not expect to see any positive catalyst in the near term, we note that the share price has corrected quite a bit and may have found a base at around S$0.40, suggesting most of the negative news has been captured. Nevertheless, we are paring our FY15 estimates by 5-13% to reflect the weak CPO outlook. Our fair value eases from S$0.44 to S$0.42, now based on 13.5x FY15F EPS (versus blended FY14/FY15F previously). Upgrade to HOLD.

FY14 NPAT down 64%
Golden Agri-Resources (GAR) reported a pretty weak set of FY14 earnings as expected. While revenue jumped 15.7% to US$7619.3m, or about 4.5% above our forecast, buoyed by the expansion of its palm downstream business; reported net profit tumbled 63.5% to US$113.6m, hit by fair value loss of S$133.7m for biological assets. Excluding this item, core earnings still fell 30.5% to US$221.3m, but was just 1.3% below our forecast. GAR declared a final dividend of 0.177 S cent/share, versus 0.515 S cent in FY13. 

Near-term volatility likely to remain
Going forward, management expects its operating performance to be affected by the fluctuating commodity prices, sustainability of the global economy, climatic conditions, as well as developments in China and Indonesia. It adds that is reviewing its oilseeds business strategy to improve operating performance, given that the operating environment in China remains challenging in the near to medium term.

Still expanding for the future
Nevertheless, GAR remains positive about the long-term prospects of the palm oil industry. For 2015, GAR plans to spend US$130m to expand palm oil plantations via organic growth and acquisition. It is also exploring new initiatives for yield improvements and cost efficiency. On the downstream, it intends to spend US$170m to extend product portfolio, distribution coverage and global market reach as well as logistic facilities to enhance its integrated operations. GAR will further increase downstream processing capacity in strategic locations. 

Upgrade to HOLD with S$0.42 FV
While we do not expect to see any positive catalyst in the near term, we note that the share price has corrected quite a bit and may have found a base at around S$0.40, suggesting most of the negative news has been captured. Nevertheless, we are paring our FY15 estimates by 5-13% to reflect the weak CPO outlook. Our fair value eases from S$0.44 to S$0.42, now based on 13.5x FY15F EPS (versus blended FY14/FY15F previously). Upgrade to HOLD.

Golden Agri-Resources

OCBC on 2 Feb 2015

Golden Agri-Resources’ (GAR) share price recently hit a fresh 52-week low of S$0.41 (on 22 and 23 Jan), no doubt weighed by the recent pullback in CPO prices. Although the stock did make a rebound shortly thereafter to S$0.435, we believe that the worst may not be over as we foresee more near-term downside risks. Some of these risks include persistent and prolonged weakness in crude prices, slower-than-expected demand for CPO, among others. Hence, we maintain our SELL rating on the stock with an unchanged fair value of S$0.44 (based on 13.5x FY15 EPS, supported by a strengthening USD), especially above S$0.45.

Hit 52-week low of S$0.41
Golden Agri-Resources’ (GAR) share price recently hit a fresh 52-week low of S$0.41 (on 22 and 23 Jan), no doubt weighed by the recent pullback in CPO prices. As warned in our 14 Dec 2014 report, we believe that the stock could slip to S$0.40 before stabilizing. Although the stock did make a rebound shortly thereafter to S$0.435, we believe that the worst may not be over.

Crude prices could see another leg down
For one, the persistent weakness in crude oil prices could continue to weigh on CPO prices, given the bio-diesel link (which has since broken down as it is even more unprofitable to process CPO or other vegetable oils into bio-diesel). While crude prices are now hovering between US$45 and US$48/barrel, some market watchers are not ruling out another leg down for crude; some speculate that prices could tumble to US$30/barrel, while others expect the weakness in crude prices to be fairly prolonged (the expectation of a rebound in crude has been pushed back towards end-2015 instead of mid-2015) .

Sluggish demand likely in winter months
Secondly, the demand for CPO is also expected to decline in the winter months; this as palm oil will solidify at much higher temperatures as compared to other vegetable oils. Thirdly, the prices of competing vegetable oils like soy and corn are still on the soft side, further reducing the substitution effect. Last but not least, the expected growth in demand could be slower than expected, after the cut in global economic growth expected for 2015, especially in China . 

Maintain SELL on strength
Although GAR’s share price is currently hovering around our unchanged fair value of S$0.44 (based on 13.5x FY15 EPS, supported by a strengthening USD), we do foresee more near-term downside risk. As such, we maintain our SELL rating on the stock, especially above S$0.45.

Golden Agri-Resources

UOBKayhian on 14 Jan 2015

FY14F PE (x): 17.6
FY15F PE (x): 15.2
Moderate FFB production growth. Its plantation upstream operation remains as the
main earnings contributor to GGR and we are expecting a 3-year CAGR of 4.4% on the
back of 4-6% FFB production growth, supported by its mature age profile. It has about
47% of prime age oil palm trees with an average age of 14 years. Going forward,
growth will be slow due to the slowdown in new plantings since 2010, in compliance
with the more stringent sustainability guidelines. FFB production in 2015 might be
affected by the drought in 2014. GGR has 46% and 51% of its planted areas located in
Sumatra and Kalimantan respectively.
4Q14 production to be weaker than usual. 4Q is seasonally a stronger quarter for GGR
but production might slow down for 4Q14 as a result of the dry weather. Production is
likely to be flat qoq and weaker yoy partially due to the high base in 4Q13. Nevertheless,
this is on track to meet our expectation of 7-10% for 2014. It has reported 9M14 nucleus
FFB production of 5.7m tonnes (+13.9% yoy). Although its 2014 production has
recovered from a marginal contraction of 5.3% yoy in 2013, production growth is unlikely
to exhibit the double-digit growth it achieved a few years back. This is mainly due to the
slowdown in new planting activities as well as most of its oil palm trees having reached
their prime age.
Maintain HOLD with new target price of S$0.48. The target price is based on 15x 2016F
PE, ie average of the last 5 years, and is in line with its Singapore peers’ valuation.

Golden Agri-Resources

OCBC on 8 Dec 2014

Golden Agri-Resources’ (GAR) share price tumbled some 13.7% to an intraday low of S$0.44 on 1 Dec; this after posting its worst set of quarterly results since 1Q09 on 12 Nov. Although its share price has fallen to our fair value of S$0.44, we do not think that the worst is over yet. For one, the uncertainty over crude prices could continue to weigh on CPO (crude palm oil) prices, mainly due to the bio-diesel link. In addition, the demand for CPO is also expected to decline going into the winter months. In view of the recent development, we are paring our FY15 CPO assumption to US$700/barrel (also driven by the stronger USD/MYR rate); while this would lead to a 3.3% reduction in our FY15 earnings forecast, our fair value remains unchanged at S$0.44 (still based on 13.5x FY15 EPS) due to the higher USD/SGD assumption. Nevertheless, we keep our SELL rating for now as the stock could slip to S$0.40 before stabilizing.

Tumbled to our fair value
Golden Agri-Resources’ (GAR) share price tumbled some 13.7% to an intraday low of S$0.44 on 1 Dec; this after posting its worst set of quarterly results since 1Q09 on 12 Nov, which saw its reported NPAT plunging some 86% YoY (-84% QoQ) to just US$4.4m in 3Q14, despite revenue rising YoY (-10% QoQ) to US$1844.1m. Although its share price has fallen to our fair value of S$0.44, we do not think that the worst is over yet.

Weaker crude may continue to weigh on CPO prices
For one, the uncertainty over crude prices could continue to weigh on crude palm oil (CPO) prices, mainly due to the bio-diesel link. Since 21 Nov, crude prices have tumbled nearly 15% from over US$80/barrel to a 5-year low of US$68; but industry experts believe prices could fall further to US$60/barrel – a level that Saudi Arabia is said to be comfortable with . Over the same period, CPO prices slipped by a smaller 2.7%, suggesting that prices could have more to fall. 

Lower CPO demand during winter months 
In addition, the demand for CPO is also expected to decline going into the winter months; this as palm oil solidifies at much higher temperatures compared to other vegetable oils, making it less “attractive” to consumers in temperate countries. As such, we do not see much positive catalysts for CPO prices in the near term. We note that GAR – the third largest palm oil plantation owner globally – has a 0.8 correlation with CPO prices over the past two years. 

Maintain SELL for the near term
In view of the recent development, we are paring our FY15 CPO assumption to US$700/barrel (also driven by the stronger USD/MYR rate); while this would lead to a 3.3% reduction in our FY15 earnings forecast, our fair value remains unchanged at S$0.44 (still based on 13.5x FY15 EPS) due to the higher USD/SGD assumption. Nevertheless, we keep our SELL rating for now as the stock could slip to S$0.40 before stabilizing.

Golden Agri-Resources

OCBC on 13 Nov 2014

Golden Agri-Resources (GAR) is probably seeing its worst set of results since 1Q09, with reported NPAT plunging 86% YoY (-84% QoQ) to just US$4.4m in 3Q14, despite revenue rising 17% YoY (-10% QoQ) to US$1844.1m. According to management, the main drag again came from its Oilseeds segment, which turned in a negative EBITDA of US$18m, hit by continued losses at its China crushing facilities. As such, 9M14 NPAT slipped 28% to US$135.5m; core earnings fell nearly 14% to US$175.7m, meeting just 57% of our full-year estimate. GAR declared an interim dividend of 0.408 S cent, versus 0.585 S cent for 9M13. Accounting for the sharp miss in 3Q14 and potentially a disappointing 4Q14, we see the need to slash our FY14 core earnings by 28% (also cutting our FY15 by 19%). Hence even as we push out our 13.5x valuation peg from blended FY14/15F EPS to FY15F EPS, our fair value slips from S$0.48 to S$0.44. Downgrade to SELL.

Worst showing since 1Q09
Golden Agri-Resources (GAR) is probably seeing its worst set of results since 1Q09, with reported NPAT plunging 86% YoY (-84% QoQ) to just US$4.4m in 3Q14; this despite revenue rising 17% YoY (-10% QoQ) to US$1844.1m. But if we add back forex losses of US$29.3m and exclude one-off disposal gain of US$7.6m, earnings would have been around US$26m; which is still down 28% YoY, also 47% QoQ. According to management, the main drag again came from its Oilseeds segment, which turned in a negative EBITDA of US$18m, hit by continued losses at its China crushing facilities. As a result, 9M14 NPAT slipped 28% to US$135.5m; core earnings fell nearly 14% to US$175.7m, meeting just 57% of our full-year estimate. GAR declared an interim dividend of 0.408 S cent, versus 0.585 S cent for 9M13.

Likely another harsh quarter ahead
While ASPs for CPO appear to be stabilizing around US$828/ton, GAR notes that CPO production is likely to not grow as fast in 4Q14 as some of its plantations are starting to show signs of tree stress from the drought earlier in the year. Management also warns that it may see some fair value losses from biological assets (but this has no impact on our core estimates). More worrying is its China crushing operations - GAR expects to see losses although it has taken steps to reduce utilisation to stem the red ink, as it may need to endure another quarter of high cost feedstock. And as feared, inventory rebounded back to 550k tons in 3Q14, versus 456k ton in 2Q14.

Revert to SELL with S$0.44 FV
Accounting for the sharp miss in 3Q14 and potentially a disappointing 4Q14, we see the need to slash our FY14 core earnings by 28% (also cutting our FY15 by 19%). Hence even as we push out our 13.5x valuation peg from blended FY14/15F EPS to FY15F EPS, our fair value slips from S$0.48 to S$0.44. Downgrade to SELL.

Golden Agri-Resources

OCBC on 5 Nov 2014

Golden Agri-Resources (GAR) is due to release its 3Q14 results on 12 Nov, where eyes will be on its China operations, which may continue to bleed red ink due to the negative crush margins there. Previously, management mentioned during its 2Q14 results briefing that it is “actively looking for solutions”, which involves strategic sourcing opportunities and the possibility of temporarily shutting down the plant to reduce the losses. Another closely watched item would be its inventory – GAR had also previously held higher-than-usual amount of CPO stock that it took a while to clear. Until then, we maintain our HOLD and S$0.48 fair value.

Stock has performed as expected
We last upgraded our call from Sell to HOLD with a new S$0.48 fair value on 9 Oct, with a view that Golden Agri-Resources (GAR) should start to look interesting around S$0.47 or better, as some of the negative news would have been priced in. True enough, we saw the stock recover from a recent low of S$0.465 shortly after to a recent S$0.525 intraday high. 

Outlook appears to be improving
Going forward, we think that the outlook appears to be improving, driven by more positive newsflow of late - the key among them is the recovery in CPO prices. Currently, CPO prices are hovering around MYR2330/ton, or about 20% above the MYR1929 low on 29 Aug, driven by hopes that the global glut in cooking oils may soon be over. And with output likely to be affected by the spate of drier-than-usual weather in the early part of this year, market watchers believe that CPO prices should recover further to MYR2500/ton by 1Q15 . In addition, Malaysia’s plan to increase the diesel blending from 5% to 7% in Nov this year should also increase the demand for palm bio-diesel.

But eyes will be on its China operations
Having said that, we think that sentiment could still remain somewhat cautious ahead of GAR’s 3Q14 results announcement on 12 Nov, where the eyes will be on its China operations, which may continue to bleed red ink due to the negative crush margins there. Previously, management mentioned during its 2Q14 results briefing that it is “actively looking for solutions”, which involves strategic sourcing opportunities and the possibility of temporarily shutting down the plant to reduce the losses. Another closely watched item would be its inventory – GAR had also previously held higher-than-usual amount of CPO stock that it took a while to clear.

Continue to trade the range
In the meantime, we believe investors can continue to trade the range as indicated above, while we maintain our HOLD call and S$0.48 fair value.

Golden Agri-Resources

OCBC on 9 Oct 2014

Golden Agri-Resources (GAR) has drifted down to our previous fair value of S$0.50 (based on 13.5x blended FY14/FY15F EPS) after posting a worse-than-expected set of 2Q14 earnings; but at current levels, some of the negative news appears to be priced in. For one, soy prices – the main reason for the drag on CPO prices – appear to be bottoming. Secondly, plantation owners may get a modest boost from the absence of export taxes on CPO in Sep and Oct. Having said that, we still see the need to reduce our FY14 CPO price assumption to US$760/ton (FY15 to US$800/ton), down around 3-5% as we see reduced risk of a impactful El Nino effect on production in 2014 (probably a bit more in 2015). This in turn reduces our FY14 revenue and earnings estimates by around 3%; also drops our fair value to S$0.48 (still based on same 13.5x blended EPS). But from a valuation perspective, we upgrade our call to HOLD.

Fallen to our fair value
Golden Agri-Resources (GAR) has drifted down to our previous fair value of S$0.50 (based on 13.5x blended FY14/FY15F EPS) after posting a worse-than-expected set of 2Q14 earnings, such that its 1H14 core net profit only met 39% of our then full-year forecast. We have since pared our FY14F earnings estimate by 17% and also downgraded our call from Hold to Sell on 15 Aug. But at current levels, some of the negative news appears to be priced in. 

Soy prices appear to be bottoming
For one, soy prices – the main reason for the drag on CPO prices – appear to be bottoming. Since crashing to a four-year low in Sep, soy futures are finally making a modest rebound of 3% since then. Similarly, CPO prices have staged a rather robust recovery of some 15% from a low of MYR1914 to around MYR2195; this also aided by stronger-than-expected demand from the European Union (net imports +5% to a record 3.48m tons in 1H14, according to Oil World ).

No export taxes in Sep, Oct
Secondly, plantation owners may get a modest boost from the absence of export taxes on CPO – this after Malaysia scrapped the tax for both Sep and Oct, while Indonesia removed it for Oct in an attempt to help boost exports. However, some market watchers warn that the move may not be enough, given renewed signs of rising inventories . Nevertheless, others are hopeful that the onset of the drier weather in Malaysia and Indonesia could reduce production, thus helping to limit supply and keep CPO prices up.

Need to lower CPO price assumptions
Having said that, we still see the need to reduce our FY14 CPO price assumption to US$760/ton (FY15 to US$800/ton), down around 3-5% as we see reduced risk of a impactful El Nino effect on production in 2014 (probably a bit more in 2015). This in turn reduces our FY14 revenue and earnings estimates by around 3%; also drops our fair value to S$0.48 (still based on same 13.5x blended EPS). But from a valuation perspective, we upgrade our call to HOLD.

Golden Agri-Resources

OCBC on 15 Aug 2014

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

OCBC on 15 Jul 2014

Golden Agri-Resources (GAR) has fallen quite a bit since reporting its 1Q14 results on 14 May, dropping some 10% to our S$0.55 fair value (based on 13.5x blended FY14/FY15F EPS). While we are upgrading our call from Sell to HOLD on valuation grounds, we note that there are no near-term catalysts for now. For one, we note that soybean futures have continued to tumble on expectations of higher-than-expected crop harvest. While the region may suffer some impact from the El Nino phenomenon, experts remain divided on the severity of the drought. Hence we are only building in a modest impact with our unchanged S$830/ton estimate for CPO this year. (Carey Wong)

Soybean futures tumble 
According to Bloomberg, soybean futures fell for the 10th straight session on Friday - its longest slump in 41 years, weighed by expectations that the US could reap a record-high crop this year, bolstered by milder-than-expected weather forecast for the growing regions. The USDA has raised its stockpile forecast (31 Aug 2015) to 415m bushels, up sharply from 325m forecast made in Jun. It expects world inventories to hit a record 85.31m tons, versus 82.88m previously forecast. 

Could start to weigh on CPO prices
Besides soybean prices, prices of corn (another substitute) have also tumbled since May to their lowest levels since 2010. In the same vein, we believe that the downward spiral in soy and corn prices could also weigh on CPO (crude palm oil), given that it is also viewed as an oil substitute (but slightly behind in the pecking order i.e. consumers tend to switch up to soy and corn oils if the price differentials are not significant). Indeed, we note that the Soy-CPO premium has narrowed considerably to the 13-year average. 

No near-term catalyst for GAR
GAR, as one of the largest palm oil plantation owners, is likely to remain vulnerable to further pullbacks in CPO prices. Over the past three years, GAR share price has shown a strong 0.7 correlation to CPO prices. While Asia is expected to experience drier-than-expected conditions due to the El Nino phenomenon, experts remain divided over the severity of the impact. We have built in a modest impact and are unlikely to revise our US$830/ton forecast at this stage. 

Upgrade to HOLD
With 2Q14 results ahead, we also hold off adjusting our estimates for now. Nevertheless, the stock has retraced quite a bit since its 1Q14 results announcement on 14 May, falling 10% to our S$0.55 fair value (based on 13.5x blended FY14/FY15F EPS). While we do not see any near-term catalyst, we upgrade our call from Sell to HOLD on valuation grounds.

Golden Agri-Resources

OCBC on 15 May 2014

Golden Agri-Resources (GAR) posted 1Q14 results that came in within expectations - revenue +34% YoY at US$1914.2 (met 27% of our FY14 forecast), while net profit eased 8% to US$103.9m (still met 26% of our full-year estimate). While GAR remains upbeat about the long-term outlook for the CPO industry, it could face some headwinds in 2Q14 - the same reasons that were a drag in 1Q14, namely negative crush margins in China and pressure on refining margins in Indonesia. But a continued rise in CPO prices could mitigate these factors and more, given that its upstream operations can contribute as much as 70% of its bottom-line. Nevertheless, current share price looks rich around current levels; downgrade to SELL with an improved S$0.55 fair value (now based on 13.5x blended FY14/FY15F EPS).

1Q14 results mostly in line
Golden Agri-Resources (GAR) posted its 1Q14 results last evening, which mostly met our expectations. Revenue climbed 34% YoY to US$1914.2m, meeting 28% of our FY14 forecast. Management noted that the big jump came from both higher production volume (+4%) as well as higher CPO prices (+9%). However, EBITDA slipped 5% to US$200.3m, marred by its Oilseeds business in China (which also saw negative crushing margins) and also lower margin from its Palm and Lauric business (still facing pressure on refining margins in Indonesia). As a result, net profit slipped 8% to US$103.9m, which still met 26% of our full-year forecast.

Still upbeat about long-term outlook
Going forward, GAR remains upbeat about the long-term outlook for the palm oil industry; it has kept its capex spending at US$550m, with US$250m for upstream growth and US$300m for downstream growth. For the downstream segment, GAR expects to use US$250m to expand its refining capacity (looking to add another 1m ton in Indonesia this year) and US$50m to grow its logistics network and also buy vessels. 

2Q14 may be sluggish
However, GAR may face some near-term headwinds in 2Q14. For one, crush margins continue to remain negative in May and are likely to remain a drag on profitability. Second, refining margins in Indonesia are still seeing pricing pressure, although management believes that the pressure has eased a little with the increased supply of CPO in the market. Nevertheless, GAR highlights that a continued rise in CPO prices could easily overcome the first two factors, given that its upstream business contributes as much as 70% to the bottom-line. While GAR has kept its CPO production growth guidance of 5-10% for this year, the actual growth could come in at the lower end due to adverse weather conditions. As it is, experts remain divided on how severe the El Nino impact will be. GAR notes that a prolonged dry spell would affect CPO production next year. 

Downgrade to SELL with S$0.55 fair value
We are keeping our FY14 estimates unchanged (but are bumping up FY15 forecasts by 2% to account for a modest El Nino impact). As we move forward our 13.5x peg to blended FY14/FY15F EPS, our fair value inches up from S$0.52 to S$0.55. But as the current stock price looks rich around current levels, we downgrade to SELL.

Golden Agri-Resources

OCBC on 3 Mar 2014

Golden Agri-Resources (GAR) put in a stronger-than-expected 4Q13 showing, such that FY13 revenue grew 9% to US$6585.0m; this was 5% higher than our forecast and 15% above consensus. FY13 reported net profit though fell 24% to US$311.3m, and core earnings was down 21% at US$318.4m, 17% above our forecast (12% above consensus). GAR declared a final dividend of 0.515 S cent/share, bringing the total to 1.1 S cents (versus 1.19 S cents in FY12). Going forward, management remains largely positive about its prospects, though it notes that competition in China remains intense. In view of the latest results and developments, we opt to increase our FY14 estimates by 2-3% higher. Note that we are also increasing our CPO forecast for 2014 from US$830/ton to US$835. Based on an unchanged 13.5x peg against our new FY14F EPS, our fair value improves slightly from S$0.50 to S$0.52. Maintain HOLD for now.

Better-than-expected FY13 results 
Golden Agri-Resources (GAR) put in a stronger-than-expected 4Q13 showing, with revenue rising 25% YoY and 21% QoQ to US$1901.8m, such that FY13 revenue grew 9% to US$6585.0m; this was 5% higher than our forecast and 15% above consensus. And because of better performance from China Operations and lower fertiliser cost, reported net profit jumped 129% YoY and 307% QoQ to US$123.0m in 4Q13; core net profit (excluding fair value gains and exceptional items) surged 212% YoY and 199% QoQ to US$113.5m. FY13 reported net profit though fell 24% to US$311.3m, and core earnings was down 21% at US$318.4m, 17% above our forecast (12% above consensus). GAR declared a final dividend of 0.515 S cent/share, bringing the total to 1.1 S cents (versus 1.19 S cents in FY12). 

Outlook remains largely positive
Going forward, management remains largely positive about its prospects, supported by robust demand for edible oils, substitute and alternative uses such as oleo-chemicals and biodiesel. Barring unforeseen weather conditions, GAR believes that CPO production should revert to the usual 5-10% growth. However, it notes that its China Agri-business' operating environment remains challenging in view of the intense competition. This year, GAR intends to spend US$250m for upstream activities, which include expanding palm oil plantations by 20-30k ha. For the downstream, it projects a capex of US$300m, with US$250m to increase processing capacity and US$50m to acquire vessels.

Revising FY14 estimates higher by 2-3%
In view of the latest results and developments, we opt to increase our FY14 estimates by 2-3%. Note that we are also increasing our CPO forecast for 2014 from US$830/ton to US$835. Based on an unchanged 13.5x peg against our new FY14F EPS, our fair value improves slightly from S$0.50 to S$0.52. Maintain HOLD for now.

Golden Agri-Resources

UOBKayhian on 3 Mar 2014

FY14F PE (x): 16.8
FY15F PE (x): 12.9
Results in line. Golden Agri Resources (GGR) reported core net profit of US$113m
(+>100% qoq, +>100% yoy) for 4Q13 and US$316m (-16.8% yoy) for 2013, within our
expectations. GGR reported a biodiesel gain of US$36.9m for 2013 (2012: US$49.3m).
No change to earnings forecasts. We are maintaining our 2014 and 2015 net profit
forecast of US$412m and US$455m respectively. Maintain BUY and target price to
S$0.70, based on 15x 2015F PE.

Golden Agri-Resources

OCBC on 16 Jan 2014

Despite a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price rose to a high of S$0.61 on 18 Nov, likely buoyed by more signs that CPO (crude palm oil) prices are stabilizing around current levels (MYR2500/ton). However, as noted in our report dated 20 Nov, we believe that the run-up in share price looked overdone. And true enough, GAR’s share price has since corrected over 14% from that high. Nevertheless, with recent correction in share price, we note that GAR is just 5% above our unchanged fair value of S$0.50 (based on 13.5x FY14F EPS). As such, we upgrade our rating from Sell to HOLD.

Price pullback as expected
Despite posting a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price recently hit a high of S$0.61 on 18 Nov, buoyed by stabilizing CPO (crude palm oil) prices; this likely on increasing expectations of a lower CPO supply coming out from both Malaysia and Indonesia in 2013. We believe that the recent announcement by the Indonesian government to double the mandatory bio-diesel blending to 10% from next year was also supportive of CPO prices. However, as noted in our report dated 20 Nov, we believe that the run-up in share price looked overdone. And true enough, GAR’s share price has since corrected over 14% from that high.

Limited CPO price appreciation in 2014
As before, we believe that most of the positives have been captured in the recent run-up in CPO prices. In addition, we believe that further CPO price upside may still be capped by the expected jump in global oilseed production. In its latest forecast, the USDA is projecting for production to hit a record 499.4m tons for 2013/2014, up 4.3m tons from Sep, with higher soybean, sunflower-seed and rapeseed accounting for most of the rise. Note that GAR also expects its CPO production in 2014 to revert back to the usual 5-10% growth. In any case, our CPO price assumption for 2014 of US$830/ton (MYR2650/ton) has already taken into account these factors. It also offers an upside of nearly 12% from an average price of US$744/ton in 2013; but we are unlikely to see a return to the US$911/ton average seen in 2012. 

Valuations looking less pricey
With the recent correction in share price, we note that GAR is just 5% above our unchanged fair value of S$0.50 (based on 13.5x FY14F EPS). As such, we upgrade our rating from Sell to HOLD.

Golden Agri-Resources

OCBC on 20 Nov 2013

Despite a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price has continued to do well, likely buoyed by more signs that CPO (crude palm oil) prices are stabilizing around current levels (MYR2500/ton), aided by slightly better demand and supply factors. Note that our US$830/ton (MYR2650/ton) forecast has already taken these factors into consideration. But further CPO price upside may still be capped by the expected jump in global oilseed production. And as the market appears to be taking on a more “risk on” approach, we apply a higher 13.5x peg (versus 12.5x previously) to our FY14F EPS, thus raising our fair value from S$0.465 to S$0.50. But given the potential downside risk, we maintain our SELL rating.

CPO prices showing more signs of stabilizing
Despite a disappointing set of 3Q13 results, Golden Agri-Resources’ (GAR) share price has continued to do well, likely buoyed by more signs that CPO (crude palm oil) prices are stabilizing around current levels (MYR2500/ton); this as on by increasing expectations of a likely lower CPO supply coming out from both Malaysia and Indonesia this year. Indeed, GAR expects its CPO production to decline some 5% this year, as opposed to its earlier 5-10% growth guidance. We believe that the recent announcement by the Indonesian government to double the mandatory bio-diesel blending to 10% from next year is also supportive of CPO prices. As such, some industry experts are expecting CPO to hit MYR2700/ton early next year, or up about 5% from here. 

Likely cap on CPO price
In any case, our CPO price assumption for 2014 of US$830/ton (MYR2650/ton) has already taken into account these factors. In addition, we believe that further CPO price upside may still be capped by the expected jump in global oilseed production. In its latest forecast, the USDA is projecting for production to hit a record 499.4m tons for 2013/2014, up 4.3m tons from Sep, with higher soybean, sunflower-seed and rapeseed accounting for most of the rise. GAR is also expecting its CPO production to revert back to the usual 5-10% growth next year. In addition, we note that there could be further increases (albeit at a slower pace) in cash cost of production, driven by rising labour costs. 

Valuations still look pricey
As the market appears to be taking on a more “risk on” approach, hence warranting a higher 13.5x peg (versus 12.5x previously) to our FY14F EPS, our fair value improves from S$0.465 to S$0.50. But given the potential downside risk, we maintain our SELL rating.

Golden Agri Resources

OCBC on 13 Nov 2013

Golden Agri-Resources (GAR) continued to feel the blunt of weaker CPO prices and suffered another disappointing quarter, resulting in 9M13 earnings meeting just 51% of our original forecast. While it expects to see the sequential growth in CPO production in 4Q13, GAR now guides for a 5% contraction in CPO production this year (versus earlier 5-10% growth guidance); although it is likely to revert to this usual growth forecast next year. While our FY13 earnings estimate is probably one of the lowest on the street, we need to slash it further by 31% (FY14 by 12%), while keeping our revenue forecasts largely unchanged. No doubt that the worst may be over, we note that the recent price rally looks overdone. As such, we maintain our SELL rating with an unchanged fair value of S$0.465 (based on 12.5x FY14F EPS versus 11x blended FY13/FY14F EPS).

3Q13 showing below our forecast
Golden Agri-Resources (GAR) continued to feel the blunt of weaker CPO prices (ASP of US$806/ton versus US$811/ton in 2Q13), with 3Q13 revenue falling 6% YoY (-7% QoQ) to US$1570.8m. Coupled with higher cost of production, reported net profit tumbled 65% YoY (down 33% QoQ) to US$30.2m. 9M13 revenue grew 3% to US$4683.1m, meeting 75% of our original FY13 forecast, but due to higher-than-expected salary costs, net profit slipped 47% to US$188.3m, or just 51% of our full-year estimate. GAR declared an interim dividend of 0.585 S cent/share versus 0.6 S cents a year ago.

Guides for lower CPO production this year
While CPO production saw a 17% QoQ growth in 3Q13, and should continue to see seasonal improvement in 4Q13, management now expects a contraction of 5% versus its earlier guidance of 5-10% growth for 2013. Capex remains at US$550m for this year, with the bulk of it going towards plantation expansion, downstream and logistics capacity increases. Nevertheless, GAR believes that CPO production should revert to the usual 5-10% growth next year. It is also generally positive about the CPO market next year, where prices should recover further. However, it warns that rising wage pressures could push cash cost of production higher again next year, although the lower fertilizer cost could mitigate the extent of the increase.

Paring earnings estimate further
While our FY13 earnings estimate is probably one of the lowest on the street, we need to slash it further by 31% (FY14 by 12%), while keeping our revenue forecasts largely unchanged. No doubt that the worst may be over, we note that the recent price rally looks overdone. As such, we maintain our SELL rating with an unchanged fair value of S$0.465 (based on 12.5x FY14F EPS versus 11x blended FY13/FY14F EPS). 

Golden Agri-Resources

OCBC on 9 Oct 2013

Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, could continue to underperform with average CPO prices down 22% YoY and 2% QoQ in 3Q13. Outlook for CPO prices is also likely to remain muted, with stockpiles growing faster than expected going into 2H13. Market watchers are expecting an excess supply of oilseeds (soy, corn etc) to further weigh on CPO prices. Meanwhile, the impasse over the raising of the US debt ceiling could send the US economy into a recession, further weighing on global sentiment. In light of the headwinds ahead, we maintain our SELL rating on the stock with an unchanged fair value of S$0.465.

CPO stocks growing faster than expected
Crude palm oil (CPO) stockpiles in Malaysia are piling up faster than expected according to a recent Reuters poll, where industry watchers see inventory in the world’s second largest CPO producer climbing to 1.91m tonnes, up 15% from Aug and also the highest since Apr. And as palm trees usually produce more fruits in the second half of the year, market watchers expect Sep output to surge 15% from Aug to 2.0m tonnes when the Malaysian Palm Oil Board publishes its report on 10 Oct (Thu) . As such, industry research Oil World believes that CPO prices could drop to a low of RMB2150/MT by early next year, citing rising global stocks and an excess supply of oilseeds (soy, corn etc). 

Geo-political events also weighing on sentiment
Meanwhile, geo-political events are also weighing on sentiment. Key among which is the impasse over the raising of US’ debt ceiling. Some experts warn of world-wide implication should the US government run out of money to pay its bills, as this could severely hurt the world’s largest economy and even send it back into recession . They also expect it to weight on the USD and raise interest rates across the board. Also expected to be affected is the demand for crude oil, and should crude prices fall below US$100/barrel, it would curtail the bio-diesel demand for CPO (even though both Malaysia and Indonesia have started new initiatives to increase the domestic mandate of bio-diesel).

Maintain SELL with unchanged S$0.465 FV
Against this bearish background, Golden Agri-Resources (GAR), being one of the largest oil palm plantation owners in the world, could continue to underperform (CPO prices on average down 22% YoY and 2% QoQ in 3Q13). Hence we maintain ourSELL rating on the stock with an unchanged S$0.465 fair value.

Golden Agri-Resources

UOBKayhian on 17 Sept 2013

Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to feel the negative impact of further pullback in CPO (crude palm oil) prices, especially after the recent rebounds in prices of CPO and GAR shares. With demand from both China and India – two of the world’s largest import markets for CPO – likely to remain soft, we believe that the worst is not over yet for the upstream players. Hence we maintain our SELL rating and S$0.465 fair value (still based on 11x blended FY13/FY14F EPS).

CPO outlook remains weak
The outlook for CPO (crude palm oil) prices is likely to remain weak as market watchers continue to expect further weakness in 2H13, weighed by expectations of higher CPO production and also increased supply from vegetable substitutes like soy and corn oils. According to Dorab Mistry, director at Godrej International Ltd, “the rally in CPO prices has just about run its course and will face downward pressure from here”. Mistry now expects to see new lows in vegetable oil and particularly in palm and lauric oil in early Jan . 

Upstream players to feel negative impact most
Golden Agri-Resources (GAR), being one of the largest palm oil plantation owners in the world, is likely to feel the negative impact the most. Over the past three years, GAR share price has shown a strong 0.8 correlation to CPO prices. And in wake of the recent rebound in CPO prices and the corresponding rebound in GAR share price, we suspect that any pullback could come quite swiftly. Nevertheless, management continues to remain upbeat about the long-term prospects of the palm oil industry, and will continue to increase its production of sustainable palm oil, improve operating efficiency and also optimise its downstream value chain opportunities. 

Maintain SELL with S$0.465 fair value
But in the short term, the prospects for GAR remain more negative. We also note that import of vegetable oils into India has fallen by nearly 17% MoM in Aug, led by crude soy oil (down 46%) and RBD palm olein (down 33%). We note that Fitch has recently warned that CPO plantation companies in Asia could face slower demand from both China and India – two of its largest import markets . As such, we do not believe that the worst is over yet and hence we maintain our SELL rating and S$0.465 fair value (still based on 11x blended FY13/FY14F EPS).