• Net losses of US$64.7m in 2QFY19
• Increased contribution from downstream business
• B30 could arrive soon

Performance Weighed by Lower CPO Prices

Golden-Agri’s (GAR) revenue fell 16.7% YoY to US$1.5b and net losses also widened 66% YoY to US$64.7m in 2QFY19. For 1HFY19, GAR’s revenue declined 14% YoY to US$3.2b and net losses widened 71% YoY to US$46.4m, which is lower than ours and the street’s expectations. 2QFY19 EBITDA was down 34% YoY to US$77m while 1HFY19 EBITDA fell 17% YoY to US$198m. The overall weak performance was attributable to lower crude palm oil prices (CPO) which was down 22% YoY and lower production output which fell 6% YoY, partially offset by better performance of Palm, Laurics and Others.

Production to Slow Down

1HFY19 revenue from plantation and palm oil mills segment fell 16.1% to US$573.9m, mainly due to lower CPO prices, but partially offset by higher sales volume due to sell-down of inventory. The fresh fruit bunch (FFB) declined 3% while palm product output fell 2% YoY to 4.4m tonnes and 1.3m tonnes respectively in 1HFY19. Management expects the full year FFB growth to be flat as the trees' biological cycle is now believed in the resting phrase after the bumper crop in 2018. We also see the rising age profile (15% of tress are older than 25 years) in Indonesia and Malaysia which could weigh on the production.

Despite GAR’s continued replanting program to replant the old trees with new high-yielding trees, we believe it will take some time for the production to recover. At the same time, management noted the concerns of some small holders reducing or not using fertilisers to save costs as a result of lower CPO price. This could result in lower production in 2HFY19 and FY20.

B30 Could be Implemented by the End of FY19

Separately, 1HFY19 revenue from Palm, Laurics and Others declined 13.6% YoY to US$3.2b, dragged by lower CPO prices and lower sales volume for oilseeds in China, partially offset by the strong demand for biodiesel in Indonesia. EBITDA increased by 148.5% YoY to US$100.4m in 1HFY19, driven by higher contribution from biodiesel and the removal of export levy in Indonesia.

Management sees the full realisation of the B20 mandatory biodiesel program in Indonesia could move Indonesia to the B30 program by the end of FY19. This could potentially increase the demand from Indonesia. We revised our forecasts to account for 2QFY19 weakness and lower-thanexpected production output, and derived the same fair value estimate of S$0.27.

Source: OCBC Research - 19 Aug 2019