• Maintain SELL, new rolled-forward Target Price of SGD0.13 from SGD0.125, 13% downside.
• We expect Golden Agri Resources to see stronger downstream contributions in the near term, from the margin improvement resulting from the recent change in export duty structure. However, this will be partially offset by weaker biodiesel margins.
• The stock is trading at 31x FY21F P/E, significantly above its peers, as well as its historical mean of 22x.

Keeping Its FFB Output Forecast at Flat Y-o-y

• For FY20, Golden Agri Resources (SGX:E5H) is keeping its FFB output forecast at flat y-o-y, despite recording a 5% y-o-y decline in 1Q20, as it expects a recovery in 2H20. We maintain our FY20 FFB growth forecast at -2%, and 3% for FY21F-22F.

Benefit From the Recent Change in Export Tax Structure

• Golden Agri Resources should be able to benefit from the recent change in export tax structure as companies with downstream refineries in Indonesia would be at a greater competitive advantage vs those in Malaysia.
• Downstream refineries will be able to buy feedstock at the CPO price minus export duty of USD55.00/tonne, while exporting its refined products with a lower export tax of USD35.00/tonne. With that extra margin of USD20.00/tonne, downstream players can offer more competitive pricing to its customers.

Refineries Were Still Running at Close to Full Utilisation

• As Golden Agri Resources’s refineries were still running at close to full utilisation in 1Q20, we do not expect them to be able to increase sales volumes. However, refining margins could improve ahead, on the back of the change in duty structure. This will be an improvement from the low single-digit EBITDA the company recorded for its downstream unit in 1Q20, caused by mark-to-market inventory losses and lower selling prices for its consumer pack products.
• Higher margins in the downstream unit could also come about in 2Q20, as the higher-priced inventory was cleared in 1Q20.

Lower Margin on the Biodiesel Front

• On the biodiesel front, Golden Agri Resources is likely to see lower margins in 2H20, given the recent change in pricing structure for Indonesian biodiesel to CPO plus USD80.00/tonne (from USD100.00/tonne) since June. It is unclear how long this change in pricing will be in effect, with some parties saying it is determined every month, while others expect it to last for three months.
• Nevertheless, Golden Agri Resources expects to still be able to book an EBITDA margin of around 3% with this price reduction, as methanol prices have declined in line with crude oil prices.

Maintain SELL

• We make no changes to our forecasts, as we had already previously assumed a discount of 5-10% to Malaysian CPO prices for our CPO price assumptions in Indonesia.
• We raise our target price of Golden Agri Resources to SGD0.13 (from SGD0.125), after rolling forward our valuation period to Jun 2021F, to reflect a 1-year investment horizon.
• We maintain our 0.5x P/BV to value the downstream wing and our USD2,100 EV/ha valuation for its upstream unit. This is lower than its peers, which are trading at USD5,000-12,000/ha. We deem this as justified, given Golden Agri Resources’s older tree age profile.

Source: RHB Invest Research - 26 Jun 2020