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 (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.
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