• 1H14 net earnings below expectations.
• Lower bottom-line of US131mn on higher downstream raw material cost and negative crushing margins, partially offset by better upstream performance
• Maintain "Neutral” with TP$ 0.55

What happened?

GAR’s 2Q14 revenue rose 38% y-y, bringing 1H14 revenue to US1019mn (27% y-y) thanks to higher sales volume and higher ASP (1H14 CPO FOB price US$853/MT vs 1H13 CPO FOB price US$795/MT). Cash cost of production reduced 16% from US$352/MT in 1H13 to US$295/MT in 1H14. The 1H14 net earnings however has declined -17% y-y to US$131mn, accounting for 28%/31% of PSR/consensus full years estimates. While revenue growth was strong, the overall profitability was impacted by the tighter refining margin from higher feedstock cost and negative soybean crushing margin. The Group’s balance sheet remains healthy with net gearing ratio at 0.26x.

How we view this

GAR’s 1H14 CPO production was up 15% on back of FFB recovery and an increase of 11K ha of mature estates. The management has affirmed that the production growth forecast will be on the high end of its initial 5-10% projection. Though the large upcoming global oilseeds supply will continue to weigh on the current soft CPO price, the upstream business performance stays positive with stronger production.

For the downstream business, the EBITDA for palm and lauric was at US$40mn (-62% y-y) with compressed refining margin affected by excess capacity in the industry and higher raw material cost. Oilseeds margin remains in the red with the tough operating environment in China. Management continues to see challenging performance for downstream business.

Investment Action

We expect its downstream business earnings to remain under pressure, offset by its upstream business with the seasonally stronger CPO production growth. In view of the weak 1H14 performance, we downgrade our EPS forecast for FY14. We maintain our Neutral rating with unchanged TP $0.55, based on a blend of P/E and DCF valuations.

Source: Phillip Securities Research - 15 Aug 2014