Golden Agri - Liquid High Beta Proxy To Plantation Sector
- We expect Golden Agri-Resources (Golden Agri) to post core net earnings growth of above 100% in 2017, coming from a significant recovery in FFB output as well as continued margin improvements in its palm downstream and oilseeds divisions.
- Valuation remains undemanding, trading at a discount to its regional peers while it is one the more sensitive stocks to CPO price, with every MYR100/tonne change affecting its earnings by 9-11%.
- Being one of the highest beta plantation stocks in Singapore would also bode well for it in times of market uncertainty.
- Maintain BUY with a slightly higher SGD.50 TP (from SGD0.46, 19% upside).
M&A in its sights.
- Golden Agri-Resources (Golden Agri) recently expanded its landbank by acquiring some 3,200ha of landbank in Sumatra for USD9.47m, or USD2,960/ha. This brings its total planted landbank to 486,275ha.
- We understand the group only has less than 20,000ha of land left to plant and should therefore continue to be on the lookout for more planted landbank in order to expand and diversify its landbank further.
- We believe that its more geographically diversified landbank (58% Kalimantan, 38% Sumatra and 4% others) would bode well for it in times of extreme climate conditions, given that the differing areas are likely to be affected differently at differing periods.
Expect to see more than 100% jump in core net profit in 2017.
- Excluding the deferred tax income recognised in FY16, we project Golden Agri to post an admirable > 100% jump in core net profit in 2017, on the back of:
- A significant recovery in FFB output of 12% YoY (albeit slightly lower than management’s target of 15-20%);
- Continued improvement in margins in its palm and laurics division on the back of higher prices and increased cost efficiencies; and
- More consistent profits at its oilseeds division, given the current higher soybean prices.
Valuations at discount to its peers.
- We up our TP to SGD0.50 based on a higher 19x 2017F P/E (from 18x) and EV/ha of USD12,000/ha (from USD11,000), as its regional peers valuations have expanded on the back of current higher CPO prices.
- We highlight that the implied EV/ha is still on the lower end of its regional peers’ USD10,000-20,000/ha, while its current P/E valuations of 15x 2017 is below its regional peer average of 19x.
- Key risks include:
- A reversal in crude palm oil and soybean price trends;
- Weather abnormalities resulting in an oversupply or undersupply of vegetable oils;
- Slower-than-expected implementation of biodiesel mandates;
- Lower-than-expected demand for vegetable oils.
- We maintain our BUY recommendation on the stock. It is highly sensitive to CPO price movements, where every MYR100/tonne change affects its earnings by 9-11% pa.
- It is also one of Singapore’s highest beta plantation stocks, which would bode well for it in periods of market uncertainty.