• Core earnings just 17% of full-year forecast
• Integrated model to support margins
• Just no catalyst yet

Slow start to FY16

Golden Agri-Resources (GAR) made a slow start to FY16, still hit by lower CPO production (-13%) and lower CPO market prices (-6%), as revenue fell 4% to US$1493.6m; this meeting just 21% of our full-year forecast. Nevertheless, it did see improved margins, thanks to its integrated business model.

EBITDA jumped 11% to US$141.9m, while GAR turned in a reported PATMI of US$94.1m versus a loss of US$3.2m in 1Q15. However, that figure was boosted by forex gain; still, core earnings of US$40m was up about 67% from the comparable core in 1Q15, though it only met 17% of our FY16 estimate.

Expects CPO output to slip more

Assuming the trend in 1Q16 continues, GAR expects to see its CPO production fall by some 10-15% this year, even lower than its initial expectation of a 8-10% fall; this is also slightly worse than the industry's 5-10% drop due to the more matured profile of its plantations (average age now 16 years). And to reduce its age profile, GAR expects to spend US$70m to replant as much as 10k ha this year; it had replanted about 1.3k ha in 1Q16.

Margins should remain stable

But GAR expects the impact to be mitigated by the rising CPO prices, supported by the bio-diesel mandate. In addition, management believes that its ongoing effort to grow its downstream business will continue to optimise margins via further vertical integration of its operations.

It also intends to build another bio-diesel plant as well as logistics facilities to enhance its integrated operations for US$110m. Management noted that one reason for the more stable margins is having the benefit of a "destination book", where it is able to sell directly to the end customers, as opposed to selling to middle men previously.

Maintain HOLD

We are paring our FY16 core earnings estimate by 9% (FY17 by 4%); but our fair value remains unchanged at S$0.34 as we push out the 12.5x valuation from FY15F to blended FY15/16F EPS. Maintain HOLD.

Source: OCBC Research - 16 May 2016