• 2H performance likely better
• But overall environment remains challenging
• Maintain HOLD

Still muted 2Q16 showing

Golden Agri-Resources (GAR) turned in a pretty muted 2Q16 performance, with revenue down 5% YoY at US$1741.8m, impacted by low production arising from the severe El Nino impact last year. As a result, EBITDA plunged 41% to US$85.9m, and it turned in a small operating loss of US$3.0m, versus US$113.2m profit in 2Q15.

But aided by a large tax credit of US$96.4m, reported NPAT came in at US$39.5m, +2.0%; however, excluding one-off items and forex losses, GAR estimates that core earnings would have jumped 279% to US$40m.

For 1H16, revenue eased 4.4% to US$3235.4m, meeting 48% of our full-year forecast, while reported NPAT came in at US$133.6m, +1753.9%; but estimated core earnings of US$80m only met 38% of our FY16 estimate.

CPO production likely to fall more

Going into 2H16, GGR does not expect CPO production to see a strong seasonal pickup; this after CPO production fell 24% in 1H16. Instead, it is now expecting production to fall further by some 15-20% for 2016, versus its earlier guidance of a 10-15% drop. According to management, the yields are only expected to normalize by 2Q or 3Q of 2017.

On the other hand, CPO prices appear to have hit a plateau of around US$700/ton; and while restocking in 2H16 should keep prices supported, management does not expect the prices to return to the US$800-900 levels any time soon. Nevertheless, GGR believes it can achieve better performance in 2H16, supported by potential La Nina conditions and further implementation of Indonesia's biodiesel mandate.

Tax benefits of US$250m expected this year

After booking a net tax benefit of US$131m in 1H16, management expects to book more of such credits in 2H16; this to the tune of US$250m for 2016, but the tax benefit will not be repeated in 2017. We have adjusted our FY16 estimates to reflect this. Pushing out our 12.5x peg to FY17F EPS, our fair value remains largely unchanged at S$0.34. Maintain HOLD for now; re-engage closer to S$0.33 or better.  

Source: OCBC Research - 15 Aug 2016