• 3QFY19 PATMI turned positive
• Recovery of CPO prices and production output
• B30 is a potential catalyst

Weak 3QFY19 But Improved QoQ

Golden-Agri’s (GAR)’s 3QFY19 revenue fell 15% YoY to US$1.6b and EBITDA dropped 19% YoY to US$106.8m, but PATMI turned positive from a loss of US$53.9m in 3QFY18 to US$0.8m this quarter. The latter brings 9MFY19’s PATMI loss to US$45.6m, which is significantly lower than ours and the street’s full year forecasts. The weak performance was attributable to continued lower crude palm oil (CPO) prices (-18% YoY) and lower palm product output (-5% YoY).

On a quarterly comparison, however, we see some improvement in GAR’s performances. GAR’s 3QFY19 revenue increased 1% QoQ, and EBITDA grew 38% QoQ to US$107m, driven by improved palm product output (+25% QoQ) as well as higher CPO price (+2% QoQ).

9MFY19 Performance Was Dragged by CPO Prices

Plantations and palm oil mills’ 9MFY19 revenue fell 16% to US$929.6m, weighed by lower CPO prices but supported by higher sales volume from the selldown of inventory. We noted that Fresh fruit production (FFP) and palm products output declined YoY for 9MFY19 but reported strong seasonal rebound in production/output which rose 22% and 25% QoQ respectively. GAR replanted 6,400 hectares in 9MFY19 vs 3,100 hectares in the same period last year, which we believe is on track to achieve GAR’s target of replanting between 10,000 to 15,000 hectares this year.

Separately, GAR’s downstream business, Palm, laurics and others’ 9MFY19 revenue was down 14.1%, dragged by lower CPO prices and lower sales volume for oilseeds in China. Palm, laurics and others’ 9MFY19 EBITDA, however, increased by 115.7% YoY to US$138.3m, due to improved EBITDA margin on the back of stronger demand for biodiesel in Indonesia and the removal of export levy in Indonesia in the last quarter of 2018. We expect the margin to improve further in 4QFY19, given the recovery of CPO prices.

B30 Program Could Boost Demand

Indonesian president Joko Widodo called for the implementation of B30 program (biodiesel with a 30% bio-content) by January 2020, which could provide a strong boost to palm oil consumption demand. Management cited the significant growth in biodiesel consumption since the implementation of B20 in September 2018 and is positive about B30, which they believe will increase the consumption to over 9 million kiloliters in 2020.

Looking ahead, we expect better 4QFY19 and FY20 due to strong demand and slower production growth of CPO which in turn could drive CPO prices up. After adjustments, our fair value estimate decreases from S$0.27 to S$0.26. HOLD.

Source: OCBC Research - 15 Nov 2019