GMG Global - Rain affected 2Q11 results (DBSVickers)

FULLY VALUED S$0.265 STI : 3,189.85 (Downgrade from Hold)

Price Target : 12-Month S$ 0.22

Reason for Report : 2Q11 results; rating downgrade

DBSV vs Consensus: Below consensus on lower rubber price

• 2Q11 core profit of S$14.2m marginally below expectations

• Volumes impacted by heavy rains in Cameroon and Ivory Coast port closure

• Downgrade to Fully Valued, TP maintained at S$0.22

Core profit of S$14.2m slightly below expectations. GMG reported core profit of S$14.2m, up 50% y-o-y (-8% q-o-q) after adjusting for exceptional gain of S$12.4m (waiver of loan owed by Teck Bee Hang (TBH) and compensation from government of Cameroon for costs of social programs) and loss of S$10m (we estimate S$8.7m after tax) from closing out of loss making rubber forward contracts – marginally below expectations.

Sales impacted by port closure and weather. 2Q11 sales volume was up 4.3% q-o-q (+149% y-o-y) to 47,409 MT. However, this was below management expectations due to prolonged heavy rainfall at Hevecam plantation and closure of ports in Ivory Coast. These events resulted in c.S$6m in lost earnings.

FY11-13F EPS reduced by 0.4% to 1.0%. Due to slower than expected recovery in volumes from TBH and higher than expected distribution costs, offset by smaller assumed discount for ASP relative to benchmark rubber prices (5.9% from 8% in FY11), we revise FY11-13F EPS down by 0.4% to 1.0%.

Downgrade to Fully Valued. With minor changes to our earnings, we maintain our S$0.22 TP. Despite our favourable view on GMG’s blend of plantations and processing plant assets and strategy of acquiring working capital constrained processors such as TBH, there is 17% downside to the share price from current level. Hence, downgrade GMG to Fully Valued.

2Q11 core profit of S$14.2m slightly below expectations

GMG Global reported 2Q11 core profit of S$14.2m (+ 50% y-o-y and -8% q-o-q) after accounting for gain of S$5.8m from waiver of loan owed by Teck Bee Hang to minority shareholders (net gain after tax and MI of S$3.2m), gain of S$15m arising from agreement with the State of Cameroon for compensation of costs for social programs at the Hevecam operations (net gain after tax and MI of S$9.2m) and pretax loss of S$10m from closure of loss making rubber forward contract entered into in the prior year (we estimate S$8.7m after tax impact). GMG also expects pre-tax loss of between S$3-4m to be incurred in 2H11 from reversal of the forward contract.

$6m in lost earnings from wetter weather and port closure

2Q11 sales volume was up 4.3% q-o-q (+149% y-o-y) to 47,409 MT. Management believes volumes could have been higher if not for prolonged heavy rainfall at Hevecam plantation (volumes for plantations were down by 1,060MT in 1H11 compared to 1H10) and closure of ports in Ivory Coast in April. Resultant impact was estimated to be $6m in lost earnings. We also understand volumes for GMG’s Indonesian operations were flat q-o-q.

Slight revision to sales volume forecasts

Despite the 2Q11 weather problems experienced in Cameroon, we are not making any changes to our Hevecam volume estimates as we had already assumed slow growth of 2% for FY11. For TRCI, we had already accounted for port closure in our numbers hence no change. However, as Teck Bee Hang only recorded sales volume growth of 3.3% q-o-q to 22,427MT in 2Q11 (44,153MT for 1H11), which was below our expectations, we reduce our TBH volume assumptions to 125k MT, 150k MT and 180k MT for FY11F, FY12F and FY13F respectively. This compares to our earlier forecast of 135k MT, 162k MT and 190k MT.

No change in gross margin assumptions

After accounting for one off losses due to reversal of a rubber forward contract entered into in the prior year, core gross margins (14.5%) were close to our expectations. Accordingly, we have not made any changes to our gross margin assumptions. We also note that TBH recorded gross margin of 5.3% in 1H11 which was in line with our FY11 forecast of 5.5%. Further with core margins remaining resilient we believe GMG’s 2Q11 results is consistent with our thesis of robust gross margins for processors due to consolidation of the processing industry vis-à-vis fragmentation of their end customers (tyre manufacturers).

FY11-13F EPS reduced by 0.4% to 1.0%.

Following changes to our volume assumptions and increase in distribution costs (higher than expected to date due to additional replanting fee in Thailand) offset by smaller assumed discount for ASP relative to benchmark rubber prices (now 5.9% for FY11versus previous assumption of 8.0%) we reduce FY11-13F core EPS by 0.4% to 1.0%.

Downgrade to Fully Valued on account of 17% downside to share price

With marginal changes to our earnings, we maintain our TP of S$0.22. Despite our favourable view on GMG’s blend of plantations and processing plants assets and strategy of acquiring working capital constrained processors such as TBH, we downgrade GMG to Fully Valued given 17% downside from the current share price to S$0.22 TP.