Golden Agri

Golden Agri: Goldman Sachs has readthrough on GGR's subsidiary PT Smart results and see downside risks for counter. PT SMART comprises about 32% of GGR’s FFB production (2011), and also owns all of GGR’s refineries. PT SMART’s 3Q12 core net profit (excluding forex) grew 1% QoQ to Rp513b (US$55m). FFB (fresh fruit bunch) production grew 10% QoQ (19% YoY), but sales grew a sharper 29% QoQ. However, this was offset by lower EBIT margins which declined QoQ to 10% (from 12% in 2Q12). PT SMART’s 3Q12 balance sheet showed inventory of Rp 2766 bn (vs Rp 2912 bn in 2Q12). House expect GGR to report 3Q12 earnings on 12 Nov, with a core net profit of U$151m (+33% QoQ) as seasonally higher production, and strong vol sales from carried over 2Q12 inventory offsets lower CPO prices. To recap, GGR’s 2Q12 earnings were below expectations as sales lagged production and inventory increased. House most of this excess inventory to be liquidated in 3Q12. PT SMART is only one part of GGR’s operations, and its earnings trend is not necessarily reflective of the wider group performance. However believe that the flat QoQ performance does indicate downside risks to house 2012E forecasts (we are in line with Bloomberg consensus), especially if GGR’s refineries (which are owned by PT SMART) did not sell through and liquidate as much inventory as house had expected. Overall, house has neutral rating on stock