Golden Agr - OCBC Investment Research(Morning Call)

Golden Agri-Resources Ltd: 2Q10 Results Mostly In Line


2Q10 results mostly in line. Golden Agri-Resources (GAR) reported its

2Q10 results yesterday. Revenue climbed 28.4% YoY (+16.3% QoQ) to

US$726.2m (just 3% shy of our forecast, aided mainly by an increase in

the ASP of CPO to US$776/ton versus US$581 in 2Q09). Net profit also

showed a 19.9% rise to US$66.0m, or 8% short of our estimate; but fell

25.4% QoQ due to higher fertilizer cost from increased volume applied in

2Q10.

For the first half, revenue rose 38.1% to US$1350.8m, meeting 48.9% of

our full-year forecast, while net profit jumped 142.7% to US$154.6m, meeting

42.8% of our original FY10 estimate. One reason for the shortfall was due

to higher export taxes paid (US$26m in 1H10 versus US$3m in 1H09). We

understand that GAR also had to incur slightly higher freight costs (US$28m

in 1H10 versus US$17m in 1H09) as it is now shipping to more destinations.

Eyes lower CPO production growth. While total CPO production

(including palm kernel) showed a seasonal 12% pick up from the previous

quarter, overall production was down 13% from the year-ago quarter;

management notes that the trees are still experiencing a biological

slowdown after a peak crop in 2H09. While GAR now expects to see up to

a 5% increase in CPO production this year (vs. 10% guidance previously),

it admits that the increase will mainly come from its increased acreage

and yields could continue to remain relatively low in light of the uncertain

weather conditions.

Likely more cautious 2H10 outlook. Meanwhile, GAR has only managed

to increase its new planting by 5.9k ha, and admits that it may not be able

to achieve its 50k ha target this year, citing adverse weather conditions

and stricter NGO considerations; organic target is now at 20k ha vs. 30k

previously, with the rest from M&A (if any). GAR also expects CPO prices

to ease from current US$780 level as recent spike was due to Russia's

ban on wheat exports. Still, GAR will continue to focus on its downstream

expansion, both in China and Indonesia.

Easing fair value to S$0.655. We are lowering our FY10F earnings by

6.4% due to lower margin assumptions. Additionally, we are also lowering

our valuation peg from 18x FY10F EPS to 16x blended FY10/FY11F EPS

to account for higher market risk aversion. This drops our fair value from

S$0.72 to S$0.655 but we maintain our BUY rating as current balance

sheet strength suggests that GAR is well-equipped to handle any

turbulence.(Carey Wong)