May 16, 2018

1Q18 core net profit of US$3m was below expectations, at only 7% of our and 2% of Bloomberg consensus’ full-year forecasts of US$166m and US$186m, respectively. The weaker-than-expected results were mainly due to lower FFB production. GGR posted an 11% yoy drop in FFB output for 1Q18 compared to our output growth projection of 9.5% for FY18. As expected, the group did not declare an interim dividend in 1Q18.

Golden Agri added back the depreciation charges of bearer plants of US$22m, to derive its reported underlying profit of US$25m for 1Q18. However, this figure is higher than our core net profit of US$3m for 1Q18, which strips out depreciation charges, to be consistent with our core net profit calculations for other Singapore planters. Our 1Q18 core net profit also excludes net forex gain of US$5m and deferred tax income of US$4m.

GGR posted a 34% yoy drop in its 1Q18 EBITDA due to weaker contributions from both its plantation as well as palm and laurics segments. The plantation EBITDA fell 33% yoy due to weaker FFB production (-11% yoy) and lower ASPs for CPO (-9.4% yoy). On top of this, its downstream division registered a 35% yoy drop in 1Q18 EBIT due to thinner refining margins. This was due partly to the suspension of CPO export tax by the Malaysian government in 1Q18 and higher import duties on palm oil imposed by India. The group blamed the lower-than-expected 1Q18 FFB output on weak production at its estates in South Sumatra (-30% yoy), East Kalimantan (-39% yoy) and South Kalimantan (-28%). It projects a strong recovery in FFB yields over the next nine months and maintains its target to increase FFB output by 8-10% in 2018. The lower output has raised its 1Q18 cost of production to US$340 per tonne. However, it maintains its target of achieving FY18 cash costs of US$300 per tonne and expects CPO price to average US$650 per tonne in 2018.

The group indicated that it plans to replant 15,000 ha of estates in 2018 and expects most of the replanting to be carried out in 2H18. The group’s palm oil inventory level stood at 490k tonnes as at end-Mar 18, lower than the 480k tonnes as at end-Dec 17. The group is also in the midst of selling its Tianjin plant for US$111m.

We cut our earnings forecasts by 22-32% for FY18-20F to reflect our lower FFB output assumptions in view of the weak 1Q18 FFB yields. We have also switched our valuation methodology from 15x historical P/E to 10% discount to its SOP but leave our target price unchanged at S$0.31 per share. We maintain our Reduce call due to concerns over its poor earnings and unexciting output prospects, as the average age of its estates is 17 years old. Key upside risks are higher than-expected CPO prices and production. Maintain Reduce with an unchanged target price of S$0.31 by CIMB. Share price closed at S$0.340