• Maintain NEUTRAL and SOP-derived TP of SGD0.30, 7% upside with c.8% FY22F yield. Golden Agri’s (GGR) 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 it is trading within its peer’s range of 6-11x 2023F P/E.

• GGR recorded USD362m in core net profit for 1H22 (+110.3% YoY), 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% YoY), offset by lower-than- expected FFB output.

• 1H22 nucleus FFB dropped 6.5% YoY despite a 9% YoY rise in 2Q22 FFB output. For FY22, GGR 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. GGR achieved a nett of tax CPO ASP of USD1,135/tonne in 1H22 (+57% YoY). 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. GGR’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. GGR expects to clear the excess inventory by end-3Q.

• Unit cost was USD312.00/tonne in 1H22 (+7.2% YoY). GGR has applied 44% of its fertiliser requirements in 1H22 thus far. Going forward, unit costs could rise in 2H22, as GGR catches up on its fertiliser application while the bulk of the higher priced fertiliser (+60% YoY) would be recognised. However, it expects higher output to help offset the higher fertiliser costs. All in, for FY22, GGR expects costs to rise 10-15% YoY (from USD300/tonne in 2021). We bring down our unit cost assumptions slightly for FY22, as we had previously assumed an increase of 20-25% YoY.

• We raise FY22F earnings 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.

• Still NEUTRAL. Our SOP-based TP is raised to SGD0.30 (from SGD0.29), 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 Research - 15 Aug 2022