What is the news?

Golden Agri’s 1Q13 core net profit of US$108mn (-33% yoy, +195% qoq) was 24%/23% of our/consensus full year forecast.

How do we view this?

The stronger qoq result was attributed to turnaround of China operations, drawdown of inventory and lower operating cost, despite the seasonally lower production. Revenue for its Indonesian agribusiness fell 6% yoy due to the 20% yoy drop in selling prices achieved for CPO, which was partially offset by higher CPO production (+8% yoy) and sales of carryover stocks were down 193k MT from end-Dec 2012 (520k MT). Furthermore, rising costs of production for palm products (+11% yoy) reduced margins, resulting in a 17% yoy drop in EBITDA posted by its Indonesian agribusiness. On the other hand, the China agribusiness showed performance improvement after 3 quarters of consecutive losses. Yoy, EBITDA from China still declined 14% to US$9mn. The higher overall EBITDA resulted in a 36% qoq increase in pretax profit. 1Q effective tax rate of 29% was above our forecast of 25%.

Investment Actions?

Albeit we are mildly positive on the turnaround of its China agribusiness as well as the ramping up of its downstream business, we see higher cost of production and effective tax rate affecting earnings in the coming quarters. We maintain our earnings estimates and Neutral rating. Our fair value of S$0.55 is still based on blended PE (12.0x FY13E) and DCF valuations. Key risks to our target price include CPO production/prices stronger/weaker-than-expected.

Source: PhillipCapital Research - 14 May 2013