August 13, 2008
BUY Maintain
Price SG$0.565
Target SG$0.890
Stellar Showing
Golden Agri Resources (GAR) posted a stellar set of 2Q results, with earnings showing sequential growth despite cost pressures. As our forecast had been a bit conservative, we now have the luxury of raising its earnings forecast slightly. The stock price has taken a beating in line with the broad sell-off in oil palm plantation stocks and is now trading at single-digit PE. We have toned down our target price to reflect a tougher outlook on a 12-month basis. Given its strong focus on efficiency, GAR is well positioned to weather any industry slowdown.
Beating expectations. GAR’s annualised 1HFY08 core net profits beat our ultraconservative forecast of US$500.2m by 6.5% on better-than-expected FFB production. Against consensus expectation of US$594.8m however, GAR’s annualised net profit fell short by 10.5%. Although we expect 2H to be seasonally stronger, the weaker CPO price would mean 2H profits are likely to be weaker than in 1H. As such, we expect consensus estimates to be downgraded to a more realistic level.
Raising production forecast. With the stronger-than-expected FFB production of 3.467m tonnes (nucleus plus plasma), we are raising our ’08 production forecast from 6.341m tonnes to 6.726m, which is still conservative given GAR’s production to date. We had previously shaved our production forecast based on tree age profile by 5% on fears that the impact of the drought in 2HCY06 could spill over into this year and next, concerns which now appear misplaced. We have also removed the 5% discount on ’09 production, resulting in a bump up from 6.476m tonnes to 6.847m tonnes.
Adjustment in effective CPO price. We have toned down effective ’08 CPO price from US$840 to US$824/tonne. Our ’09 effective CPO price remains at US$740/tonne.
Profit forecast up but target lower.. As a result of changes in FFB production forecast and effective CPO price assumption, we are raising our earnings forecast for ’08 by 2.2% to US$513.3m and revising upwards our ’09 forecast by US$1.0m to US$419.5m.
With another 4.5 months before FY08 ends, we are rolling over our valuation to FY09. We are now pegging GAR at just 15x earnings bringing its target price to a more realisable SG$0.89. GAR is now trading at single-digit PE. Maintain Buy.
KEY HIGHLIGHTS
Salient points from analyst briefing:
Dividend up. GAR has declared an interim dividend of 0.8 cents (SG$), up from 0.5 cents last year, bringing its interim dividend payout to SG$79.8m compared to SG$49.9m last year.
Hectarage expansion. GAR’s planted hectarage now stands at 368k hectares. The company is guiding for a 40K to 60k ha expansion compared to 60k ha before. We believe a 60k increase solely from own planting is somewhat aggressive. However, the company is also looking at some small scale acquisitions to help reach that target.
Mandatory biodiesel blend. GAR’s management is optimistic that the mandatory biodiesel blend being jointly worked out by Malaysian and Indonesian governments will come to fruition. The company has land ready for the construction of a biodiesel plant if the mandatory blend materialises. Based on 20m kilolitres of unsubsidised fuel consumed by Indonesia, a 5% mandatory blend will draw down about 0.9m tonnes of palm oil, or about 5% of Indonesia’s production. Combined with Malaysia’s 0.5m-tonne palm oil required for mandatory biodiesel usage, the amount of palm oil to be converted for energy use will be substantial.
China’s edible oil market. In the past few months, the Chinese government has been artificially suppressing its edible oil imports by using oil from its reserves as well as “borrowing” from the market. To our question of how long China’s edible oil reserves can last, management indicated that without any imports China’s reserves are only sufficient for 1 month.
Production cost. Cost of production per tonne of CPO has increased from US$200/tonne to US$220, mainly due to higher fertiliiser cost. However, based on its fertiliser profitability programme, the company believes there is no need at this point to reduce fertiliser application to maintain profitability.
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