Golden Agri-Resources: Small earnings despite big bounty

Its agressive expansion won't translate to booming profits due to rising costs, says DBS. 

Profit margins at GAR are shrinking, if latest 4Q11 earnings are an evidence.

Spiraling fertilizer costs brought down operating profits far below expectations, forcing the brokerage firm to cut its FY12 earnings forecast by 6.8% on account of likely slimmer margins.

Here's more from OCBC:

4Q11 core earnings disappoints
Golden Agri-Resources (GAR) reported core earnings that missed our forecasts. Although 4Q11 revenue rose 11.7% YoY to US$1327.9m, or 0.9% below our forecast, it fell 15.0% QoQ due to weaker CPO ASPs achieved. And also because of higher fertilizer cost as labour cost, operating profit fell 28.2% YoY and 11.9% QoQ to US$155.0m. As a result, core net profit (excluding bio-asset gains and exceptional items) fell 37.7% YoY and 21.9% QoQ to US$90.6m; it was also 41.5% below our forecast.

We understand that GAR also had excess CPO left over in its inventory due to “logistic issues”. For FY11, revenue jumped 69.9% to US$5952.9m, or just 0.2% shy of our forecast; while core earnings climbed 47.6% to US$571.4m, it was 12.3% below our estimate (nearly 10% below consensus). Meanwhile, GAR declared a final cash dividend of 1.84 S cents, versus 0.77 S cent last year; payable on 15 May.

Spending US$500m on capex
For this year, GAR intends to build on its core competitive strengths by expanding its operations both upstream and downstream. To achieve this, GAR intends to spend US$500m as capex, with US$250m going to expand its palm oil plantation by 30k ha (both greenfield and via M&As). Another US$200m will be used to increase its downstream processing capacity in strategic locations, while the remaining US$50m will be used for infrastructure to extend its distribution coverage and logistic facilities to enhance its integrated operations.

Downgrade to HOLD with S$0.77 fair value
In light of the latest results and also using a slightly higher CPO assumption of US$1000/ton (US$950/ton previously), we bump up our FY12 revenue estimate by 2.7%; but cut our earnings by 6.8% (due to lower margin assumptions). Still based on 12.5x FY12F EPS, our fair value eases from S$0.82 to S$0.77. Given the limited upside, we downgrade our call to HOLD; we would be buyers below S$0.70