SINGAPORE (Aug 27): Golden-Agri Resources must be feeling an awful sense of deja vu after the 2Q19 results announcement.

Like in FY18, the palm oil plantation company now expects FY19 to end in the red after being hit by weaker fresh fruit bunch (FFB) output, lower crude palm oil (CPO) prices and higher costs.

For the 2Q19 ended June, Golden Agri reported net loss widened 65.8% to US$64.7 million ($89.8 million) from a loss of US$39.0 million in the same quarter a year ago. Revenue for the quarter fell 16.7% to US$1.5 billion from US$1.9 billion in the previous year.

For 1H19, Golden Agri reported a bigger loss of US$46.4 million compared to a loss of US$27.2 million a year ago.

Several reasons contributed to the weaker bottomline. FFB output from the group’s nucleus estates fell by 10% due to dry weather in parts of Kalimantan. Secondly, Average Selling Price (ASP) of CPO products fell by 16% y-o-y to US$561 per tonne, while cost of production grew 4% y-o-y to US$313 per tonne due to higher fertiliser prices.

In addition, the group had an inventory build-up of 569,000 tonnes as at end June compared to 489,000 tonnes at the end of the previous quarter, which saw plantation EBITDA for 2Q19 fall 65% from the preceding year.

So will Golden-Agri overcome these challenges and swing back into the black anytime soon?

Sadly, a recovery is not in sight for FY20. Managment has lowered production guidance with FFB output from its nucleus estates now expected to be flat y-o-y versus previous guidance of 5% output growth.

The group is also reviewing its replanting target of 15,000 ha for FY19 as part of its capex spend review, after replanting only 3,300ha in 1H19.  

Indeed, analysts are echoing the same negative sentiment, citing the continued dry weather in Kalimantan as a major dampener along with losses incurred from joint ventures.

They are forecasting a loss for FY19 while FY20-21 earnings are being scaled back by 30-40% on the back of forex assumptions, lower FFB output and higher unit cost assumptions.

One bright spot though is the low likelihood of the group being affected by the EU biodiesel tax as the bulk of biodiesel is exported to China.

CGS-CIMB Research is maintaining its “reduce” call on Golden Agri with an unchanged target price of 23 cents to reflect lower CPO price assumptions and FFB yields, but continues to bet on an earnings recovery in 2H19 due to seasonally higher production.

“We keep to our reduce call due to concerns over its earnings trailing behind those reported by its industry peers, ageing estates (average age: 17 years) and potential impairment on its investments in oil palm estates in Liberia,” says analyst Ng Lee Fang.

Similarly, RHB Research is maintaining its “sell” call on Golden-Agri with a target price of 22 cents, with bleak outlook expected for the group in the near future.

“Golden Agri’s core earnings remained in the red in 2Q19, coming from weaker FFB output, lower prices and higher costs. We now expect FY19 to remain in the red, with earnings only returning to the black in FY20. Valuations too, remain expensive at the current juncture,” says RHB.

As at 2.38pm, shares in Golden Agri are trading 1.5 cent higher at 26 cents or 40.5 times FY20F earnings, with a valuation of 0.51% according to CGS-CIMB valuations.