Golden Agri reported poor 1Q09 numbers on Friday. Net profit fell 94% yoy to US$8.46m, 98% short of our full-year forecast and 58% below Bloomberg consensus. Revenue collapsed 44% yoy to US$412m. Gross profit fell 76% yoy to US$63.4m, vs US$264.6m in 1Q08. However, adjusting for non-cash gains, operating earnings rose 32% qoq. So, the results were not as dire as the headline numbers suggest. The company also announced that it is considering a US$200m rights issue to fund expansion. This is despite Golden Agri’s 0.09x net gearing as at 1Q09 and its US$138m cash balance.
CPO production is suffering in parts of Indonesia due to adverse weather conditions. Drought-like conditions have led to poor yields for Golden Agri. The 17% fall in CPO production was caused by a 24% fall in CPO yield and a 24% fall in FFB yield. We were expecting a 15% rise in CPO production for the year. The loss of production was pronounced in the drought-hit regions of South Kalimantan, East Kalimantan and Lampung region, according to management. Hence, this may not be representative of the whole market.
We increase our DCF-based target price for Golden Agri to reflect our higher CPO price assumptions. However, we lower our earnings estimates, due to the lower-than-expected CPO production. We expect the drought in parts of Indonesia to depress CPO production by 5% in FY09 to 1,610 tonnes. Although we remain positive on CPO prices and the overall sector, we believe Golden Agri is now close to its true value, with the share price up two-fold since November 2008. At 12.7x FY09F PE, we believe it no longer presents an undervalued opportunity. Thus, we downgrade to Hold (from Buy).
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