SINGAPORE (Jan 28): RHB Research is resuming coverage on Golden Agri Resources with a “sell” recommendation and a lower target price of 23 cents from 39 cents previously.
While RHB expects 2019 to be a better year after an extremely weak 2018, the house expects earnings to take some time to recover to its previous base of more than US$200 million.
This will likely be after the company revamps its landbank via aggressive replanting and cost management.
“Downgrade to “sell” from “neutral”...given the low earnings base in 2019 post recovery from a weak 2018,” says RHB in a Monday report.
“We apply an EV/ha valuation of US$5,000/ha ($6,760/ha) for Golden Agri’s plantation division and downstream target P/E of 10x which is in line with peers’.”
Golden Agri, one of the world’s biggest producers of palm oil, is part of the multi-billion Sinar Mas Group business empire of Eka Tjipta Widjaja who passed passed away at his home in Jakarta on Saturday at the age of 98.
See: Indonesia palm oil tycoon who built $12.6 bil empire dies
9M18 core earnings reversed into the red with US$18.5 million of losses, from a profit of US$101 million in 9M17. This was mainly due to lower CPO prices, weaker refining margins and losses incurred at its oilseeds division in China as a result of the US-China trade war. Total FFB growth in 9M18 came in at 6%.
In a Monday report, RHB expects a turnaround to profitability in 4Q18. This is on contingent on effective tax rates returning to normal, continued y-o-y growth in FFB (fresh fruit bunch) output and lower unit costs, as the bulk of its fertiliser application was completed in 9M18.
Management’s guidance for FFB growth in FY18 is 10%, which implies more than 20% y-o-y growth in 4Q18. RHB believes this is possible, as it is coming from a low base in 4Q17. This also implies a 9% q-o-q decline in output, which is seasonal in nature, since peak output is likely to have been in 3Q18. Refining margins should also improve slightly q-o-q, on lower CPO prices, while the oilseed division had already turned around in 3Q18.
For 2019 and 2020, RHB forecasts FFB growth to normalise to 3% y-o-y, slightly below management’s guidance of 5%.
The house expects slower FFB growth – given Golden Agri’s aggressive replanting programme. It intends to replant 10,000-15,000ha over the next few years from 5,000-7,000ha pa previously. This is aimed at rejuvenating its tree age profile, which is currently at around 16 years on average.
“We believe a more significant impact from the aggressive replanting activities will only be seen 3-4 years later,” says RHB, “Our CPO price assumptions are US$553/tonne for 2019 and US$632/tonne for 2020.”
RHB is cutting its forecasts by 67-82% for FY18-19, after imputing lower CPO price assumptions and higher unit cost projections.
As at 11.20am, shares in Golden Agri are down 30.8% at 27 cents from 39 cents a year ago.
