Golden Agri-Resources Ltd - Robust 2Q11 showing; maintain BUY (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.62

Fair Value: S$0.80

Robust 2Q11 performance. Golden Agri-Resources (GAR) put out another strong set of results, as 2Q11 revenue surged 120.4% YoY (+9.4% QoQ) to US$1600.5m, or 10% above our forecast; But gross margin was mixed, coming in at around 31.4% in 2Q11, while up 8.2 percentage points (ppt) from 2Q10, it fell 4.5 ppt QoQ. Reported net profit improved by some 172.3% YoY (but eased 22.0% QoQ) to US$179.9m. Estimated core net profit jumped 151.6% YoY (down 22.4% QoQ) to US$166.2m, or around 4% ahead of our estimate. For 1H11, revenue also surged 126.8% to US$3063.5m, meeting 75.5% of our original FY11 forecast, while reported net profit climbed 165.6% to US$410.6m; estimated core net profit came in around US$380.4m, meeting 62.5% of our FY11 estimate.

Seasonal recovery in CPO production. On the operations front, CPO production saw a decent 8% QoQ increase to 650k tons; palm product yield also improved further to 1.5 tons/ha from 1.4 tons in 1Q11 and 1.0 ton in 2Q10. For the quarter, GAR achieved ASP of US$1137/ton, though down slightly from US$1150 in 1Q11. Meanwhile, cash cost also crept up to US$291/ton in 2Q11 (versus US$260 in 1Q11) due to the appreciating IDR against the USD; GAR also used 40% more fertilizer in 2Q11 following a wet 1Q11. Barring any adverse weather conditions, GAR believes it should be able to achieve >10% increase in CPO production for 2011.

Growth strategy still intact. As before, GAR intends to invest some US$450m as capex this year, with the bulk going into its expansion in the high-margin upstream business; this as it targets to increase its planted area by 20-30k ha this year, mainly via its own plantings; but management does not rule out acquisitions (of complementary crops like rubber and sugar) if opportunities arise. It plans to expand its downstream production capabilities in cooking oil, margarine and other specialty fats to shift product mix into higher value-added products. It also aims to develop its destination business and extend the distribution reach of value-added CPO products in key countries.

Maintain BUY. Due to the higher-than-expected ASP achieved, we are raising our CPO price assumption from US$950/ton to US$980/ton; and to also account for the robust 2Q11 showing, we are raising our FY11F revenue forecast by 15.2%; earnings forecast by 10.7%. But due to current depressed market sentiment, we lower fair value from S$0.96 to S$0.80 (now based on 12.5x blended FY11F/FY12F PER versus 16x FY11F PER previously). Maintain BUY.