Results below expectations. Golden Agri's 1HFY14 core earnings were below expectations, making up 39% of our full-year forecast and 36% of consensus estimate. Its plantation upstream business did well but was more than offset by weakness in downstream and oilseed segments.  

Crushing loss. Golden Agri suffered a USD43m loss in its crushing business in China. Management explained that operating conditions remain difficult in Tianjin, China and it has reduced the utilisation rate to minimise losses. We note that Wilmar International's (WIL SP, NR) crushing business already turned profitable in 2Q, from a record negative margin in 1Q. Golden Agri is now reviewing its options for the crushing business.  

Plantation business.The upstream business did well with nucleus production growing by 15.3% YTD and 8.2% q-o-q. The weaker price in 2Q reduced earnings but 1HFY14 segment EBITDA still grew by 42% yo-y. On the other hand, the downstream segment suffered earnings contraction due to thinner refining margin amid competition for feedstock. YTD downstream earnings fell 62%. We expect refining margin to improve in 2H as the seasonally higher palm oil output should increase feedstock supply.  

Positive on CPO price outlook. Golden Agri views downside to the palm oil price as limited. We note that its view from the start of the year has been for palm oil prices to be range-bound.

Acquisition to be completed soon. The company is still guiding for a 20-30k ha increase in planted area, including an acquisition to be completed in 2H, which should boost its nucleus planted area by 16k ha or 4.3%. Maintain BUY, TP SGD0.64 (vs SGD0.66).

 

Source: OSK-DMG