• Muted near-term outlook for CPO
• Cutting FV to S$0.35
• Downgrade to SELL

Core NPAT down 48%

Golden Agri-Resources (GAR) reported a very weak set of 1Q15 results. Due to lower CPO production as well as soft CPO prices, GAR saw a 19% YoY slide in revenue to US$1553.3m, meeting just 21% of our original FY15 forecast. Also hit by a large forex loss of US$35.0m, reported net profit slipped 83.5% to just US$17.2m; core earnings slipped 48.2% to US$52.1m, meeting only 18.3% of our previous full-year forecast. But management highlighted that there were good sequential improvements, with core earnings actually +13% QoQ even though revenue slipped 15%.

China situation improving but not out of the woods

By segments, the Oilseed business continued to recover in !Q15, aided by improved business conditions in the Chinese crushing industry; however GAR expects the environment there to remain challenging and it is reviewing its business model and strategy for its China oilseeds business.

Separately, Plantations and Palm Oil Mills recorded a 32% YoY fall in revenue and a 41% plunge in EBITDA in 1Q15, mostly due to sharply lower ASPs and to some degree, lower CPO output due to dry weather conditions experienced in certain parts of Indonesia.

While management remains upbeat that production should pick up in 2H15, it notes that the overall industry could face adverse weather impact brought on by El Nino in the coming months. However, GAR notes that there is a still a chance that higher CPO prices could mitigate the effect of lower production volumes.

Downgrade to SELL with lower S$0.35 FV

Although GAR remains confident of the longer term demand growth for CPO, the near-term outlook is still quite challenging, given the stillsluggish CPO demand (also likely damped by ample supply of substitute vegetable oils). As we see the need to par our FY15 and FY16 estimates further, our fair value slips from S$0.42 to S$0.35, although still based on 13.5x FY15F EPS. Downgrade to SELL.

Source: OCBC Research - 13 May 2015