• Golden Agri-Resources (GGR)’s 1H22 earnings came in above our and Street’s full-year estimates, as the export ban only affected 36% of its products during the period.
• Earnings should be boosted by inventory drawdown in 2H22, although this could be offset somewhat by lower downstream margins.
• We believe valuation is fair at the current juncture, as Golden Agri-Resources's share price is trading within its peer’s range of 6-11x 2023F P/E.
• Maintain NEUTRAL on Golden Agri-Resources and SOP-derived target price of S$0.30, 7% upside with ~8% FY22F yield.

Golden Agri-Resources' 1H22 Core Net Profit Up 110% Y-o-y

• Golden Agri-Resources (SGX:E5H) recorded US$362m in core net profit for 1H22 (+110.3% y-o-y), due to higher ASPs. Its results exceeded expectations, at 78% of our FY22 forecasts, and 61% of Street’s estimates. This was mainly due to lower-than-expected unit costs as well as stronger-than-expected contributions from its oleochemical joint venture (+292% y-o-y), offset by lower-than-expected FFB output.
• 1H22 nucleus FFB dropped 6.5% y-o-y despite a 9% y-o-y rise in 2Q22 FFB output. For FY22, Golden Agri-Resources is now guiding for a slightly lower FFB growth of 4% (from 5%), expecting 3Q to be the peak quarter. To be conservative, we keep our FFB growth projections at 0-3% for FY22-24F.

Only 36% of Products Affected by the Export Ban

• Golden Agri-Resources achieved a nett of tax CPO ASP of US$1,135/tonne in 1H22 (+57% y-o-y). The company managed to circumvent some of the export ban impact by selling more value-added products like oleochemicals and biodiesel which were unaffected by the ban, resulting in only 36% of its 1H22 sales volume being affected by the ban.
• Downstream margins rose to 5.3% in 1H22 (from 3.6% in 1H21) on the back of the wide tax differential between CPO and PPO. This margin is likely to narrow in 3Q, given the 2-month tax levy holiday.

Inventory Build-up in 1H22

• Golden Agri-Resources’s CPO inventory level at the end of June was 742k tonnes (from 449k in 1Q22), which is about close to double its normal inventory levels of 300-400k. Golden Agri-Resources expects to clear the excess inventory by end-3Q.
• Unit cost was US$312.00/tonne in 1H22 (+7.2% y-o-y). Golden Agri-Resources has applied 44% of its fertiliser requirements in 1H22 thus far.
• Going forward, unit costs could rise in 2H22, as Golden Agri-Resources catches up on its fertiliser application while the bulk of the higher priced fertiliser (+60% y-o-y) would be recognised. However, it expects higher output to help offset the higher fertiliser costs.
• All in, for FY22, Golden Agri-Resources expects costs to rise 10-15% y-o-y (from US$300/tonne in 2021). We bring down our unit cost assumptions slightly for FY22, as we had previously assumed an increase of 20-25% y-o-y.

Still NEUTRAL

• We raise FY22F earnings forecast for Golden Agri-Resources by 43% and FY23-24F earnings by 7-10% after adjusting for lower unit costs for FY22 and higher contributions from its downstream operations and JV for FY22-24.
• Our SOP-based target price for Golden Agri-Resources is raised to S$0.30 (from S$0.29), which includes an ESG discount of 6%, based on our ESG score of 2.7. Valuations are fair, as it is trading within its peer range of 6-11x 2023F P/E.

Source: RHB Invest Research - 15 Aug 2022