Strong results in 2Q09, but still below expectation. Net profit of Golden Agri-Resources (GGR) soared by 543% qoq to US$55m in 2Q09 on the back of higher palm products production (+30% qoq) and higher CPO price.
However, 1H09 net profit still declined 78% yoy due to lower ASP, higher fertiliser costs and lower production. Results were below our expectation as 1H09 net profit represents only 25% of our full-year forecast.
CPO production volume recovered in 2Q09. CPO production rose 31% qoq in 2Q09 but still fell 2% yoy in 1H09 as the company experienced poor 1Q09 production on the back of biological tree stress, and less favourable weather conditions, mostly in southern parts of Sumatra and South Kalimantan.
Margin improved on sturdy CPO prices. Gross margin improved to 23% in 2Q09 on stronger CPO prices. But 1H09 gross margin declined to 20% due to forward buying on higher fertiliser cost as well as lower selling prices.
Target 30,000ha of new planting in 2009. GGR targets new planting area of 30,000ha for 2009. During 1H09, the company added 9,800ha of new planting area. This year, the company has a capex of about US$225m.
Higher earnings in 2H09. We expect higher earnings in 2H09 than in 1H09 on the back of sturdy CPO prices in 2H09 as well as improved margins mainly from lower fertiliser cost in 2H09. Management indicated that nucleus production cost (ex-mill) is expected to maintain at US$250/tonne in 2009.
Downgrade to SELL. As share price has exceeded our fair price, we downgrade GGR from BUY to SELL with a fair price of S$0.48, based on 12x 2010F PE for mid-cap and integrated plantations players. We recommend investors to take profit on GGR and start to accumulate at S$0.40.
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