Golden Agri

Golden Agri (GAR) 3Q16 results turned around to US$219.7m from a US$16.4m loss a year earlier, benefitting from a tax credit of US$104.3m (3Q15: US$19.8m). This brought 9M16 earnings to US$353.3m (9M15: US$9.2m loss).

Revenue climbed 16.6% to US$1.84b from growth in its palm & laurics (+15.6%) and others (+6.3%) segments but was pared by a contraction in its oilseeds business (-5.3%).

Overall EBITDA margin of 9% (+0.9ppts) was mainly boosted by the improved oilseeds environment in China as well as improved palm & laurics operations.

This brought 9M16 revenue to US$5.07b (+2.3%) and EBITDA to US$393m (-2.1%) or about 74% of street estimates respectively.

3Q16 segmental breakdown:
Plantation & Palm Oil Mills - Revenue: US$379m (+5%), EBITDA: US$90m (-6%)
The recovery in revenue came from the improvement in CPO price to US$677/MT (+27%), which more than offset the decline in palm product output of 624,400 MT (-22%). EBITDA margin was slightly affected by an export levy that was implemented in Jul '15.

Palm & Laurics - Revenue: US$1.63b (+16%), EBITDA: US$61m (+121%)
Better market conditions as well as improved downstream operations helped the group to realise higher margins and EBITDA during the quarter.

Oilseeds & Others - Revenue: US$193m (-3%), EBITDA: US$18m (+429%)
Reduced revenue was mainly due to lower sales volume of 256,000 MT (-13%). However, EBTIDA was supported by the better oilseed crushing margin in China.

Aside to the tax credit, bottomline was also shored up by US$19.8m in FX gain (3Q15: US$45.4m loss) as well as US$45.3m in fair value gain on biological assets (3Q15: US$6.4m loss).

The profit reversal saw operating cash flow balloon to US$276.5m (3Q15: US$23.7m), in line with a seasonally stronger 2H16.

Moving forward, management expects to benefit from the global slowdown in production, coupled with domestic demand growth through the implementation of the biodiesel policy in Indonesia. With about 82% (43% aged 7-18 years) of its trees in the prime producing stage, the group could potentially see a significant uptick in production going into 4Q16.

On its downstream prospects, GAR is currently constructing new biodiesel processing capacity. In total, GAR has pencilled in FY16 capex of US$180m.

The plantation counter is currently trading at forward P/E of 15.6x relative to pure upstream producers First Resources (22.3x) and Bumitama Agri (16.5x).

The street has 6 Buy, 4 Hold and 7 Sell ratings on GAR with average TP of $0.38.

Latest broker ratings:
UOB Kay Hian maintains Buy with TP of $0.42
CIMB maintains Reduce but raises TP to $0.38 from $0.35
OCBC maintains Hold but raises TP to $0.37 from $0.34
CLSA maintains Sell but raises TP to $0.35 from $0.33