Golden Agri-Resources - If Indo's 2016 FFB output falls by 10% YoY, it would be bullish for palm oil price

GGR's results beat market expectations as 9M FY15 core net profits accounted for 89% of the market's full-year estimate. 3Q FY15 core net profits increased 137% YoY.

The results were better than expected as tax rate was significantly lower than expected due to a write-back. 3Q FY15 plantation cash cost fell 26% YoY (GGR reduced fertiliser application due to dry soil conditions) and improved refining margins.

A rising tide lifts all ships—all upstream plantation companies will outperform if palm oil prices rally. GGR is sometimes seen as an ideal candidate for hedge funds, as it has a high beta, is large (market cap of US$3.5 bn), and is liquid (ADV of US$7.1 mn). We prefer FR and BAL among the Singapore-listed plantation stocks.

GGR's management stated FY16 FFB output could fall by 10% YoY with El Nino. If this plays out, it would be bullish for palm oil prices. We revise up GGR’s FY15 net profits by 9% and revise our target price, based on FY16 EPS, to S$0.35. Maintain NEUTRAL.

GGR’s 9M FY15 core net profit decline 3% YoY
GGR's results beat market expectations as 9M FY15 core net profits accounted for 89% of the market's full-year estimates. 9M FY15 core net profits fell 3% YoY, but 3Q FY15 core net profits increased 137% YoY.

The results were better than expected as:
(1) Tax rate was significantly lower than expected due to a write-back,

(2) 3Q FY15 plantation cash cost fell 26% YoY as GGR reduced fertiliser application due to dry soil conditions, and

(3) refining margins improved.

9M FY15 plantations' EBITDA declined 30% YoY as palm oil prices weakened 26% YoY, and FFB output was down 2% YoY. GGR's FY16 FFB output could fall by 10% YoY owing to tree stress due to the El-Nino induced droughts. If this scenario plays out, it would be bullish for palm oil prices.

9M FY15 palm and laurics' EBITDA rose 76% YoY with better refining margins. EBITDA per tonne rose to US$13.0 in 3Q FY15 vs 3Q FY14's US$3.5. GGR is accelerating its capex commitment for the downstream division to take advantage of Indonesia’s biodiesel programme.

The oilseed division was profitable in 3Q FY15 with EBITDA per tonne of US$10.1 versus losses in 3Q FY14 as crushing margins improved. GGR wants to dispose off its business in China.

GGR has high beta
A rising tide lifts all ships—all upstream plantation companies will outperform if palm oil prices rally. GGR is sometimes seen as an ideal candidate for hedge funds as it has a high beta, is large (market cap of US$3.5 bn), and has high liquidity (ADV of US$7.1 mn). We prefer FR and BAL among the plantation stocks listed in Singapore.

Technical Analysis
Daily Chart
Maintain NEUTRAL
We revise up GGR’s FY15 net profits by 9% and revise our target price, based on FY16 EPS, to S$0.35. Maintain NEUTRAL. (Read Report)

Read Related Reports
1) Golden Agri-Resources - Forex losses hit 3Q reported earnings by CIMB Research, published on 13 November 2015

2) Golden Agri Resources - No surprises by DBS Group Research, published on 13 November 2015

3) Golden Agri-Resources - Maintain HOLD with S$0.34 FV? by OCBC Investment Research, published on 13 November 2015

4) Golden Agri - 9M Earnings In Line by RHB Research, published on 13 November 2015

Source : Credit Suisse Asia Pacific Equity Research

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