• Soft 1Q19
• Valuations less demanding but not compelling
• Looking to the government

Soft Set of 1Q19 Results

In its latest 1Q19 results, Golden-Agri’s (GAR) revenue fell 11.0% YoY to US$1.6b while gross profit dropped 22.3% to US$192.8m. Along with a similar drop in operating expenses, higher foreign exchange gain and US$11.4m gain on disposal of a subsidiary, GAR registered a 54.5% rise in net profit to US$18.3m for the quarter. This constituted 17% of ours and the street’s earlier full year expectations.

EBITDA from plantation and palm oil mills fell by 35.9% to US$60.8m with lower CPO prices compared to a year ago, offset by higher sales volume. For palm, laurics and others, EBITDA was higher at US$59.3m vs. US$28.0m a year ago with additional contribution from biodiesel and the removal of palm oil export levy from Indonesia.

Post the set of lower-than-expected results, we have lowered our FY19F estimates but kept our FY20F numbers intact.

Valuations Now Less Demanding But Not Compelling

Since our earlier report on 9 Apr 2019 in which we noted the stock was trading close to the +1 s.d. level in terms of P/B valuations, the share price of GAR has corrected by about 20%, possibly because of its weaker-than-expected results and the recent market sell-down.

As at 24 May 2019, the stock is trading close to its historical mean over the past five years, which is comparatively less demanding but still not yet compelling, unless CPO prices stage a fasterthan-expected recovery. At this point, however, the recent correction in crude oil prices has meant that the palm-oil-gas-oil spread has narrowed, making palm less attractive for blending into biofuel. Weak soybean oil prices, a substitute for palm oil, are also keeping the palm market under pressure.

Monitoring Government Policies

On the other hand, government policies in Indonesia and Malaysia are expected to provide support to palm oil prices as both countries increase the mandatory use of diesel containing locally produced biofuel. For instance, Indonesia implemented the B20 program since Sep 2018, and there are expectations that the B30 program may arrive by the end of this year. We update our estimates and our fair value slips from S$0.29 to S$0.27. Maintain HOLD.

Source: OCBC Research - 27 May 2019