We assume coverage on Golden Agri (GGR) with an UW rating (from NR) and a Jun-16 PT of S$0.26 (Neutral, Dec-14 S$0.65 PT prior to NR). The stock lacks drivers given reduced new plantings with a relatively matured plantations age profile (average tree age: 15 years), low profitability downstream, and lagging ROEs vs peers. Hence, though GGR has underperformed significantly with a FY16E P/B of 0.7x at current levels (after adjusting for the accounting change to IAS 16 for biological assets effective Jan-16), we believe this is warranted.
• Slower mid to longer-term FFB growth prospects
New plantings have been put on hold pending implementation of GGR’s forest conservation and social/community requirements as identified by The Forest Trust (TFT). We think this, along with its relatively matured plantations (42% of estates have past prime ages with only 14% young and immature, lowest among peers), will see slowing FFB growth prospects in the absence of acquisitions.
• Low profitability downstream; plans to rationalize operations Competition remains keen, pressuring margins for both the Indonesia palm and laurics (i.e. processing of cooking oil, margarine, and oleochemicals) and China soybean oilseed crushing units. But, volumes are still growing for palm and laurics though on a decline for oilseed crushing for the group. GGR’s palm and lauric’s profitability is also lagging behind comparable peer, SIMP. To improve performance, GGR targets JVs with local partners overseas in the refining/branded consumer products business (entry into India since 2014), and to rationalize its China business with planned sale of one of its two soybean crushing plants, which will halve capacity.
• Valuation, PT & risks. Our Jun-16 PT of S$0.26 implies 11x PE for 2016E (historical mean: 12x)
But, adjusting for the accounting change to IAS 16 for biological assets effective Jan-16, we estimate FY16E ROE of 5.6% (vs 2.4%), and our PT implies an FY16 PE of 15x and P/B of 0.6x. FY16E net gearing would also rise to 62% (from 28%) with IAS 16.
1) Stronger CPO prices.
2) Accretive acquisitions and/or successful rationalization of the oilseed crushing China unit to improve profitability. (Read Report)
Source : JP Morgan Asia Pacific Equity Research