Golden Agri-Resources - 2016 earnings boost from tax credit not sustainable
- Project better core earnings in FY17 due to stronger output and higher selling prices.
- The US$242m tax credit, which helped boost 9M16 reported profit, is not sustainable.
- Maintain Reduce as P/E is at a premium over historical average.
FFB output recovering from El Nino effect
- We expect Golden Agri to post better core net profit in FY17, driven by stronger production, higher selling prices and a slower rise in estate costs. We forecast the group's FFB output to rise 17% in FY17, thanks to improving yields from its estates, which are expected to recover from the El Nino effect experienced in 2015.
- To recap, the group's FFB production dipped 19% in 9M16, broadly in line with the group's guidance of 15-20% falls in FFB output for 2016, due mainly to the drought and haze experienced at its estates in 2015.
- Golden Agri indicated that production for its estates could peak in Nov and overall FFB production for 4Q16 could remain as strong as 3Q. For 2017, the group revealed that FFB output could recover to the 2015 level, which suggests a 15-20% rise in output. It is positive on CPO price until the end of the year. Both are in line with our expectations.
Reported net profit boosted by tax credit in 2016
- We gathered that Golden Agri revalued its plantation assets to take advantage of the lower 3% tax rate on revaluation gains in 2015, down from 10%. This exercise allowed it to book substantial one-off tax income, which helped boost 9M16 net profit.
- Golden Agri estimated that it could book US$300m deferred tax benefit for FY16, out of which US$242m was recognised in 9M16 and the remaining will be captured in 4Q16.
M&A needed to lift growth
- The slower expansion of planted estates over the past few years may crimp Golden Agri’s future output growth unless it steps up its M&A efforts.
- On top of this, its existing estates are getting older. 45% of the group's estates were above 18 years of age as at 30 Sep 2016, up from 26% in 2012.
Downstream expansion is good for the long term
- Golden Agri currently refines in-house most of its palm products. Its strategy is to have downstream capacity that could cover all its upstream production and expand its distribution channels.
- We are positive on the long-term prospects of this plan as it will help improve the value-add of its palm products.
Maintain Reduce call due to rich valuations
- Golden Agri stands out among the regional planters for its liquidity (the highest) and palm oil estate size (second-largest). However, we feel that the stock is fairly valued at the current price level as its P/E is at a premium over its historical average.
- We maintain our earnings forecasts and target price, which is based on 15x historical P/E. Our Reduce call is intact due to unexciting near-term earnings prospects. (TP S$0.38)
- Furthermore, we expect the group's downstream expansion to take time to bear fruit.
- A key upside risk to our call is higher-than-expected CPO prices.