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Golden Agri-Resources - Weak returns from downstream

Shared By Stock Fanatic on Sunday, March 1, 2015 | 1.3.15

Golden Agri’s FY14 core net profit of US$221m was 10% above our forecast, but in line with consensus estimates. The better results were mainly due to the sale of 50k of inventory in 4Q. Reported earnings were below due to a US$134m loss from changes in biological assets. We cut our FY15-16 EPS forecasts by 2-13% to reflect the weaker refining margin. We also reduce our target price to S$0.44, as we apply a 10% discount to its historical average P/E of 13x for the challenging operating environment of its downstream business. Our Hold rating is intact. The stock lacks re-rating catalysts given the unexciting CPO prices and overcapacity concerns in the refining space.

4Q14 slips into the red due to losses from biological assets
Golden Agri posted a net loss of US$22m in 4Q14 due to a loss of US$134m from changes in fair value of its biological assets. Excluding this and forex gain/loss, the group’s core net profit would have been US$46m in 4Q14. For the full year, core net profit fell 31% mainly due to a US$60m loss from its oilseeds division (due to negative crush margins in China) and a 60% drop in earnings from its palm and laurics division.

Downstream ventures not bearing fruit yet
The group’s aggressive expansion into downstream business in 2012 has not delivered good returns so far, due to poor refining margins and start-up costs for its new facilities and expansion in destination markets. The group has been successful in gaining market share but this appears to be at the expense of lower margins. In FY14, sales volumes of its palm and laurics products grew 20% yoy to 8m tonnes of palm products, representing around 27% of Indonesia’s output. However, the PBT margin for this division fell to only US$1.5 per tonne in FY14 from US$15.5 per tonne in FY13 due possibly to more aggressive selling to improve its distribution network. Overall, the fall in palm and laurics earnings more than offset the higher plantation profit in FY14, leading to weaker earnings from its Indonesia agri business despite the flattish selling price of CPO and lower costs of production for its CPO.


Technical Analysis
Daily Chart
Cutting earnings forecasts
We lower our FY15-16 earnings forecasts by 2-13% to reflect weaker production growth and refining margins in view of overcapacity issues. In line with this, we cut our target price to S$0.44. (based on 11.7x forward P/E). (Read Report)

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Source : CIMB Research


Posted on Sunday, March 1, 2015 | 1.3.15
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