Poor 3Q due to lower output
▊ Golden Agri’s 3Q13 core net profit (down 60% yoy) came in below our and market expectations due mainly to weaker FFB production from its estates (down 14% yoy) and higher inventory (+100k tonnes qoq) as at end-Sep 13. 9M13 core net profit accounted for only 58% of our full-year forecast and 52% of consensus. We cut our FY13-15 net profit forecasts by 4-22% to reflect lower FFB production estimates. However, our target price is higher at S$0.60 (14x CY15 P/E, the historical average) as we roll forward our valuations to end-14. We maintain our Neutral rating.
The wrong combinations
Golden Agri posted its weakest quarterly profit since 4Q12, as the group's 3Q13 performance was hit by lower selling prices, weaker FFB production, higher production costs and inventories. On a qoq basis, the weaker earnings were due to the higher CPO stocks of 442k tonnes (+100k tonnes qoq) and labour costs as the group paid an additional month’s salary to workers during the Lebaran festival in 3Q13. We were surprised that 3Q’s FFB production fell by 14% yoy, significantly below our forecast of a 5% growth in production. We gather the weaker yield registered by its estates was due to: (1) unfavourable weather in some parts of Indonesia; and (2) palm trees entering their lower production cycle following the bumper harvest achieved over the past two years. Its China agribusiness reported a lower EBITDA of US$4m in 3Q13 vs. US$11m in 2Q13.
Cutting production targets
The company lowered its FFB production guidance for the year to -5% from previous target of 5-10% output growth, following the weaker yields achieved by its estates. We cut our FY13 earnings by 23% as we lower our FFB production assumption by 10%.
Near-term price weakness
The poor 3Q performance may lead to near-term price weakness. However, we believe earnings may have bottomed in 3Q and better CPO prices should lift 4Q earnings.