Golden Agri-Resources - 2Q09: Strong results but below expectation

Net profit of Golden Agri Resources (GGR) soared by 543% qoq in 2Q09. As share price has exceeded our fair price, we downgrade to stock from BUY to SELL.

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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Golden Agri-Resources - 2Q09 Yields Surprise

Reiterate OW: We upgrade our PT to S$0.55 per share on higher FY2009-11e EPS estimates. The share price for Golden Agri-Resources (GGR) is now discounting a CPO (crude palm oil) price of US$730/T vs. our FY2010 estimate of US$800/T. GGR will trade at FY2010e PE of 10x at our new TP, low against sector average of 14x.

Surprise in 2Q09 Yields… GGR’s 2Q09 FFB yields came in 22% higher than our estimate and 4% above 2Q08. Indonesian-wide FFB yields, which suffered from tree stress since 2H08, is now back to normal, we think. …Drive EPS Upgrade. 2Q09 net profit came in 54% above our estimates on positive operating leverage unleashed from the higher-than-expected CPO production/sales volume. We revise our EPS estimates higher to account for the higher CPO production/sales volume and margins.

CPO Stocks Remain Tight: Despite the recovery in Indonesian production yields in 2Q09, global CPO stocks remain tight in the near term for two reasons: 1) Yield stress is not over in Malaysia. We see yield recovery only in 2010 for Malaysia; and 2) CPO export demand remains robust.

Best Upside within Coverage: Our 2009-11e EPS estimates are 27% above consensus, mainly on our higher CPO price assumption. Currently, GGR has the best share price upside of 20% within our coverage universe. Near-term catalysts: 1) Consensus earnings upgrade; 2) Firm CPO price trend going into Ramadan festival; and 3) Good 3Q09 results in November 2009.

Golden Agri-Resources Ltd: Maintain HOLD

2Q09 results mostly within expectations. Golden Agri Resources (GAR) released its 2Q09 results on Friday; revenue was down 30.7% YoY but rebounded 37.2% QoQ to US$565.6m, aided by slightly firmer QoQ CPO (crude palm oil) prices as well as higher production volume. The average CPO price fell from US$1117/ton in 2Q08 to US$696/ton in 2Q09 but was an improvement from US$511 in 1Q09. As a result, while net profit tumbled 64.7% YoY, it was up nearly 543.0% QoQ to US$55.1m. For the first half, revenue fell 37.5% to US$977.8m, meeting 41.9% of our original FY09 estimate, while net profit slid 78.1% to US$63.7m, or about 23.6% of our full year forecast.

CPO production likely bottomed in 1Q09. Operationally, it appears that the worst of the previous tree stress (due to the drought in 2006) has passed; CPO production increased 15.1% YoY and 30.8% QoQ, while CPO yield improved 1.5% YoY and 26.9% QoQ. We also understand that due to the better-than-expected production, GAR has about 100k ton of unsold CPO at end-Jun, but has since been sold. And while there may be a possible El Nino effect this year, management believes that the impact will probably be felt some 12 months later. It is also confident that it will escape the worst of the impact due to the dispersion of its oil palm plantations in Indonesia. Management is hopeful of seeing better production numbers in 2H09; also assured that it will not have excess unsold CPO this time around.

Bumping up our CPO assumptions. The recovery in the global economies has come slightly faster than expected and this has lent some support to crude oil prices and CPO prices. We have also raised our CPO assumptions for this year from US$600/ton to US$620/ton, and this in turn bumps up our FY09 revenue forecast by 6.8%. However, we raise our net profit estimate by a smaller 4.2% as GAR will still be working through the excess fertilizer that it had bought at a much higher price late last year; management expects to only enjoy lower fertilizer prices from next year onwards. We are raising our FY10 revenue and earnings estimates by 6.0% and 11.0%, respectively. Using a higher 12x blended FY09/FY10 EPS valuation (vs. 10x previously), our fair value will rise from S$0.35 to S$0.45. Given the limited upside, we maintain our HOLD rating.

Golden Agri-Resources: Ex-Right Fair Value of S$0.35

Trading of rights and warrants. Golden Agri Resources (GAR) will begin to trade its rights shares (up to 1,764m) on 27 Jul and the warrants (up to 705m) on 28 Jul. As a recap, GAR initiated a rights cum free warrant issue to raise S$311m net proceeds to "pro-actively strengthen the balance sheet, financial flexibility and competitive position" of the group to support its growth, both internally and externally. After the issue, we note that its net gearing will drop from 9.1% as at end 2008 to just 2.1%.

CPO prices stabilizing after recent slide. The recent slide in CPO prices from an average of US$693 per ton in 2Q09 to around US$595 in Jul was due to the fall in crude oil prices below US$60/barrel as well as worries that the global economic recovery could be a long-drawn affair. This has also resulted in a fall in GAR's share price but it comes as no surprise as the group - being one of the largest palm oil producers in the world) - is susceptible to these fluctuations. While CPO prices have rebounded slightly over the past few days, the outlook for the CPO market remains hazy - supply is widely expected to rise in 2H0 while demand remains uncertain. Nevertheless, we do not expect CPO prices to fall below US$500/ton and should average around US$550-570/ton in 2H09.

Expect 2Q09 results to show good QoQ growth. In any case, given that the average CPO prices have improved from US$538/ton in 1Q09 to US$693 in 2Q09, as well as a very poor 1Q09 showing, we expect GAR results to show relatively good QoQ growth. On the topline, we are expecting a QoQ growth of 20%; however it would still be down nearly 40% YoY, given that the average CPO prices back then were around US$1004/ton. While net profit is expected to surge some 198% QoQ, it is likely to be down 82% YoY; again due to the sharply lower CPO prices.

Adjusting fair value to S$0.35. Although we are bumping up our FY09 earnings slightly by 1.7%, it is mainly due to higher interest income (after the rights issue), we are leaving our revenue number unchanged for now. Meanwhile, our ex-right fair value estimate has been adjusted from S$0.40 to S$0.35. Given the limited upside, we retain our HOLD rating. We would be buyers below S$0.30.

Golden Agri-Resources - Signs of production trends turning around

The worst may be over for Golden Agri’s (GAGR) production, which first started deteriorating significantly in Q408. To recap, GAGR’s FFB production declined by 24% YoY in Q408 and 15% YoY in Q109. Although GAGR explained that the contraction was due to weather issues and tree stress, GAGR’s production trends underperformed the sector during this period.

After a troubled Q109, yields and production appear to be improving. Yield started turning positive YoY in April. Yield was still negative YoY in March, although monthly trends were already improving significantly. We expect continued improvement in June/July as the effects of tree stress diminish and as GAGR addresses the bottlenecks and infrastructure problems caused by adverse weather.

We maintain our assumption that production contracts 3% in 2009. We prefer to wait to see if the turnaround in sustainable. However, if we assume production grows by 7% (in line with GAGR’s 5-8% guidance), our 2009 net profit forecast could be lifted by 11%. Aside from production, costs would start improving in Q309 as fertiliser bought at high cost in 2008 would have been drawn down.

Our price target is based on a sum-of-the-parts valuation where the plantations division is valued on a DCF assuming long-term CPO price of US$570/tonne, a WACC of 14%, and long-term growth of 5%.

Golden Agri-Resources - Adjusting for rights issue

Golden Agri share price will go ex of its proposed rights issue today. To recap, Golden Agri has proposed a fully underwritten 17-for-100 rights with free detachable warrants at S$0.18 per share. We are raising our net profit forecasts by 1-2% for FY09-FY11 to account for the net interest savings from the US$215m proceeds raise from the rights issue. However, we lowered our FY09-11 EPS by 8-13% due to the enlarged share base. Our target price is cut from S$0.48 to S$0.43 to account for the dilution from the rights issues. However, we are upgrading our call on the stock to Trading Buy from Neutral as valuation for the stock is now more attractive following the stock underperformance against the Singapore market. Since our last update on 5 June 2009, Golden Agri's share prices have tumbled 11% against the decline in the market of 2.4%. Key re-rating catalysts are potential earnings-enhancing M&A and lower than expected operating costs.

Timetable of the Rights Issue for Golden Agri-Resources

Golden Agri-Resources Ltd r proposed underwritten renounceable rights issue of up to 1,763,739,384 new ordinary shares in the capital of the Company (“Rights Shares”) at the issue price of S$0.18 for each Rights Share, on the basis of 17 Rights Shares for every 100 existing ordinary shares.

Shares trade ex-rights : 25 June 2009 from 9.00 a.m.
Books Closure Date : 29 June 2009 at 5.00 p.m.
Despatch of the OIS and application forms : 2 July 2009 and letters to Entitled Shareholders
Commencement of trading of “nil-paid” Rights : 2 July 2009 at 9.00 a.m.
Last date and time for trading of “nil-paid” Rights : 10 July 2009 at 5.00 p.m.
Last date and time for splitting Rights : 10 July 2009 at 5.00 p.m.
Last date and time for acceptance of and payment : 16 July 2009 at 5.00 p.m.
for Rights Shares with Warrants (at 9.30 p.m. for electronic applications)
Last date and time for renunciation of and payment : 16 July 2009 at 5.00 p.m. for Rights Shares with Warrants
Last date and time for application and payment for : 16 July 2009 at 5.00 p.m. excess Rights Shares with Warrants (at 9.30 p.m. for electronic applications)

Golden Agri-Resources Ltd: Downgrade to HOLD

Dismal 1Q09 results. Golden Agri Resources (GAR) posted a dismal set of 1Q09 results on Friday. Revenue slipped 44.8% YoY (-30.3% QoQ) to US$412.2m, meeting about 17.6% of our full-year estimate; net profit (excluding fair value adjustments of its bio-assets) plunged 93.7% YoY (- 78.3% QoQ) to just US$8.6m (2.6% of FY09 estimate). There are three reasons for the shortfall. First, the plunge in CPO (crude palm oil) prices from US$1077/ton in 1Q08 to US$511/ton in 1Q09, and we understand that GAR's achieved sales price was even lower at US$482/ton. Secondly, the drop in CPO production (down 17% YoY and 12% QoQ) due to tree stress and heavy rainfall in certain locales. Thirdly, higher fertilizer costs, which raised the cost of production by 10% to US$275/ton, and continued to weigh on margins.

Has CPO production bottomed in 1Q09? Despite the volatile commodity prices outlook, management believes that the demand for CPO, being the cheapest edible oil, is supported by core demand from the edible oil and oleo-chemical markets. Hence, it is keen to both expand its high-margin upstream business and select downstream capabilities and distribution. It expects to spend US$225m in capex this year. Management is also confident that GAR has seen the bottom of its CPO production, as the worst of the tree stress (due to the drought in 2006) has passed and its yields should start to normalize. Nevertheless, it has retained a tinge of caution as it has scaled down its new planting target from 50k hectares to 30k.

Possible rights issue overhang. Separately, on report that GAR has appointed BNP Paribas and Credit Suisse to raise US$200m via a rights issue, it clarified that it has not given the mandate yet. Management admits it is in talks with several investment banks on the possibility as it feels that trying to raise funds via debt is still difficult and expensive. Management adds any additional funds would come in handy when "opportunities arise". Assuming that GAR is looking to raise that amount, the potential dilution is at least 7%.

Downgrade to HOLD. Due to the dismal 1Q09 results, we have pared our FY09 earnings by 22.7%, but our fair value remains at S$0.40 based on 10x FY09F PER (vs. 8x previously - in line with the general re-rating of the overall market). But given the potential overhang from the rights issue as well as the limited upside, we downgrade our rating to HOLD.

Golden Agri announces rights issue to raise S$311m

Golden Agri Resources (GGR) announces 17-for-100 rights issue at S$0.18/share, representing about 60.0% discount to yesterday's closing price or 56% to the theoritical ex-rights trading price of S$0.41.

The right issue will be atttached with 2-for-5 warrants with 3-year maturity date and at an exercise price of S$0.54/share.

The exercise from the right issue will raise fund approximately S$311m (after deduction of estimate expenses), while the exercise of warrants will raise fund of S$381m (assuming all the warrants exervised). About 80% used of the right and warrants proceeds to support company's business through organic growth as well as through external acquisitions, while remaining 20% would be used for working capital. This right issue figure of US$311m accounted about 7% of market capitalization.

Flambo International Limited, together with nominees and custodians, which hold a 48.6% stake in GGR, have undertaken to fully subscribe for their entitlement of rights units.

Golden Agri-Resources Ltd - Rights issues potential leads to uncertainities

Golden Agri's 1Q09 core net profit of US$9m was below expectations, making up only 5% of our FY09 forecast and 3% of consensus. The poor results were due to lower-than-expected FFB production from its own and plasma estates. We are negative on its potential rights issue as it will be EPS-dilutive. Also, the group has no firm acquisitions that would require funding and gearing was low at only 0.09x as at 31 Mar 09. We are cutting our FY09-11 net profit forecasts by 6-15% to account for 1Q's weaker-than-expected FFB yields. We are reducing our target price to S$0.39 from S$0.46 to incorporate our earnings downgrade and a lower target P/E of 11x (from 12x). Following the stock's recent outperformance against the market, the poorer-than-expected 1Q results and our negative take on the potential rights issue, we downgrade it to Neutral from Trading Buy.

Golden Agri-Resources - Hang in there

Golden Agri's share price has risen more than two-fold since November 2008 and we believe it is no longer cheap. We believe the weak 1Q09 result, due to adverse weather, was a temporary setback and will be reversed. We are positive on CPO prices and forecast an average price of US$700/t (vs US$650/t) for 2009.

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).

Golden Agri Resource - Fruits to return - Sell to Buy

1Q09 is likely to have been the worst operating quarter for Golden Agri. We expect FFB yields, which were at 3 year lows of 17.7% in 1Q09, to rise to 21.6% in 2009 as weather conditions improve and the effect of the “tree stress” from the 2006 drought dissipates. Golden Agri owns some of the best managed estates with some of the highest FFB yields in the industry. We also expect significant reductions in the company’s operating costs from 4Q09 onwards as the company will have run through its costly fertilizer inventory.

In light of the stronger than expected demand for edible oils and the lower than anticipated supply of soybeans from a poor planting season in Latin America, we are upgrading our CPO price forecasts from US$500 to US$650 in 2009 and to US$700 in 2010. We still expect CPO prices to drop and average US$690/ton for the remainder of the year as new supply will come on stream in 2H09. However, these new CPO prices lead us to increase our FY09 & FY10 net profits estimate by 28% and 80% respectively.

The company announced that it is considering doing a rights issue to raise US$200m. We see this as a negative overhang on the stock as it could dilute the share base by 8% and we don’t see a need for a rights issue here given that the company’s gearing is only 9%. Only if it were to use the money for an accretive acquisition would a rights issue make sense.

As a result of the 200bps drop in our Indonesian risk free rate assumption, and our earnings upgrade from higher CPO price expectations, we are upgrading our DCF-derived target price from S$0.21 to S$0.45. We believe the stock is attractive at 10x FY10CL and an EV/EBITDA(10CL) of 6.5. After accounting for the possible rights issue, the stock still holds 11% upside (S$0.42 TP). Upgrade from SELL to BUY.