SINGAPORE (Nov 14): Analysts are maintaining their downbeat forecast on Golden Agri-Resources following its 3Q18 results announcement last night, which largely came in below expectations.

Golden Agri reversed into the red in 3Q18 and 9M18 with losses of US$53.9 million ($74.6 million) and US$81.1 million, respectively, due to weaker palm oil prices.

Revenue for the quarter saw a 3.2% y-o-y increase to US$1.8 billion while cost of sales increased by 4.7% to US$1.6 billion.

This brings 3Q18 gross profit to US$277 million, 4.3% lower than the previous year.

See: Golden Agri reverses into the red in 3Q and 9M on weaker palm oil prices

Following the results announcement, CGS-CIMB is reiterating its “reduce” call on Golden Agri with a reduced target price of 23 cents, from 25 cents previously, due to concerns over the group’s poor earnings and ageing estates.

In 9M18, the group added back depreciation charges of bearer plants of US$74 million in its results report, to derive its reported underlying profit of US$79 million.

In a Tuesday report, analyst Ivy Ng Lee Fang says, “However, this figure is higher than our core net profit figure of US$4.9 million for 9M18, which strips out depreciation charges, to be consistent with our core net profit calculations for other Singapore planters.”

In addition, weaker contributions from all the group’s key divisions led to a 27% y-o-y drop in 9M18 EBITDA, while downstream division saw a 47% y-o-y decline in EBITDA due to the untimely purchase of feedstock.

Golden Agri posted 9M18 core net profit of US$5 million, which compared to peer First Resources (that CGS-CIMB has an “add” call on) has a core net profit of US$93 million. This was despite the group’s larger planted nucleus area of 395,764 ha, compared to First Resource’s 176,930 ha.

“We suspect this could be due to higher operating costs at GGR compared to FR. We are also slightly concerned that the bulk of the GGR’s borrowings of US$2.88 billion are at floating rates, so borrowing costs could rise in line with higher US interests.”

Similarly, UOB KayHian is keeping its “sell” recommendation on Golden Agri with a target price of 20 cents.

In 3Q18, the group experienced inventory build-up, due to the peak production period and delay in shipping.

In a Wednesday report, analyst Leow Huey Chuen says, “We understand that there was inventory build-up in 3Q18 due to the peak production period and delay in shipping. As such, we are likely to see higher sales volume in 4Q18.”

Apart from this, most of the fertiliser application has been completed in 9M18. The analyst expects 4Q18 cost of production and overall results to better.

The group’s management expects slightly lower fresh fruit bunches (FFB) production growth of 7% y-o-y for 2018, compared to 8-10% y-o-y previously.

FFB production is expected to continue improving yoy in 4Q18. FFB production growth in 2018 would mainly be supported by yield improvement, while FFB production from new mature areas will be offset by losses in production due to replanting activities.

On the outlook, CPO prices are expected to be capped by the high inventory in the short term.

“However, CPO prices could improve in 2019 on the back of an increase in biodiesel consumption while potential reduction in import duty in India could boost palm oil demand,” says Leow.

Nonetheless, the analyst has cut 2018 profit forecast by 20% to factor in lower FFB production growth, lower palm and laurics segment EBITDA margins, and adjusted interests expenses are higher as interest rates were underestimated previously.

“We also cut 2019 net profit by 20% to factor in higher fertiliser costs,” adds Leow.

As at 3.24pm, shares in Golden Agri are trading at 24 cents, or 0.5 times FY19 book with a dividend yield of 2.1%.