• Reiterate NEUTRAL with SOP-based Target Price of SGD0.25, 6% downside.
• GOLDEN AGRI-RESOURCES (SGX:E5H)’s core earnings remained in the red in 3Q19, coming from weaker FFB output, lower prices and higher costs.
• We continue to expect FY19 to remain in the red, with earnings only returning to the black in FY20.

3Q19 Core Losses Narrowed Q-o-q, With USD23.5m of Losses

• This was in line with our FY19 core net loss projection of USD107m, but significantly below consensus’ projection of a profit of USD15m. FFB production fell 6.9% y-o-y in 9M19, while CPO prices were down 15%.
• Management has lowered its 2019 FFB growth guidance to -3% (from flat previously), which implies that 4Q19 would be slightly higher q-o-q vs 3Q19. Management noted that rainfall is back to normal in most areas now, after 3-4 months of dry weather. For FY20, Golden Agri-Resources is expecting FFB output to also record flat to -3% y-o-y decline, due to the dry weather impact. We keep our FFB growth target of -2% for FY19.
• Golden Agri-Resources has replanted 6,400ha in 9M19, on track to hit its 10,000ha target for 2019.
• Golden Agri-Resources achieved unit costs of USD305/tonne in 9M19 (+6% y-o-y), on higher fertiliser prices and lower yield. It is unlikely to complete its fertilisation programme for FY19, as it has only applied 60-70% of its requirements (vs 80- 90% normally) in 9M19. For 2019, it is maintaining its USD300/tonne cost guidance (+5% y-o-y).

Biodiesel Running at Full Capacity

• In 9M19, the downstream division recorded EBITDA margin of 2.9% (up from 1.3% in 9M18). Management expects downstream EBITDA margins to improve further in 4Q19 (from 3Q19’s 2.5%), on the back of higher selling prices.
• Golden Agri-Resources’s 600,000-tonne capacity biodiesel plants were running at full capacity in 3Q19, with 70-80% of this going to the local market.
• For FY20, it has received an allocation of 780k kilolitres (up 41% from FY19’s 554k). Although this is higher than its capacity, it intends to run its plants at longer hours and more days in order to fulfil its obligation. Management intends to double up capacity at its biodiesel plant in Kalimantan to 600k tonnes by 2021 (at a cost of USD50m), given the Indonesian government’s aggressive biodiesel rollout.

We Make No Changes to Our Forecasts

• We expect 4Q19 to post stronger earnings vis-à-vis 3Q19, given the higher CPO price environment.
• Maintain NEUTRAL, with an unchanged SOP-based Target Price of SGD0.25.
• We apply an EV/ha of USD5,500ha for its plantation assets and target P/E of 15x FY20F for its downstream division. This is at the lower end of its peers’ range of USD6,000-14,000/ha, which we believe is justified given its older age profile. The downstream target P/E of 15x is in line with its peers’ 12-15x.

Source: RHB Invest Research - 14 Nov 2019