Golden Agri

Golden Agri’s (GGR) 2Q14 results were below estimates. Net profit slumped 40% y/y to US$27.3m (-74% q/q), despite a 21% y/y rise in revenue to US$2.0b. Higher revenue was led by the Plantations and palm oil mills segment (+38% to US$518m) and Palm and laurics segment (+37% to US$1.7b). Plantations segment benefited from higher output (+28% to 761,000 MT), alongside higher CPO average selling prices (+6% to US$840/MT). Meanwhile, sales volume from the palm and lauric segment rose 24% to 2,049,000 MT, led by increased capacity. The revenue increase was partially offset by lower contributions from the Oil seeds segment, at US$214m (-37%), due to lower sales volume (-37%) resulting from reduced utilisation of China facilities to manage costs. Overall gross margins however fell to 16.7% from 18.0%, impacted by lower margins from the Palm and Lauric and Oil seeds division, as a result of higher raw material costs, as well as the challenging soybean crushing industry in China. Bottom line was further weighed by a 34.1% rise in selling expenses to US$189.5m, led by the increase in freight costs and export tax, while the group also recorded FX losses of US$18.5m (+109.6%) due to translation loss on USD denominated payables in China following the strengthening of USD against the Rmb. On its outlook, GGR guides that the short-term outlook for the palm oil industry is expected to be volatile, but remains positive in the longer term given its strong fundamentals, while supply growth is expected to slow down. The group will continue to increase its production of sustainable palm oil and enhance its integrated operations by broadening the product portfolio with higher value-added products, as well as extend its distribution and logistics capabilities to reach out to more destination markets. The operating environment in oilseed business is however expected to remain challenging. GGR’s net gearing stands at a relatively low 0.22x, and at the current price the group trades at 13.3x forward P/E. Latest broker ratings: CIMB maintains Hold with TP $0.58 (prev. $0.60) Credit Suisses downgrades to Neutral with TP $0.58 (prev. $0.82) Deutsche maintains Buy with TP $0.77 Goldman Sachs maintains Neutral with TP $0.53 HSBC downgrades to Neutral with TP $0.58 (Prev. $0.67) OCBC downgrades to Sell with TP $0.50 (prev. $0.55)