Expect a weaker 2Q due to export ban

■ GGR’s 1Q22 core net profit was above due to higher CPO price achieved.
■ We are concerned that 2Q22F earnings may weaken due to the ongoing
palm oil export ban, which will lead to higher logistic and storage costs.
■ Downgrade to Hold from Add, with a lower TP of S$0.30, as CPO price could
trend lower in 2H22F on rising output while operating costs could rise.

Strong 1Q22 earnings beat due to better CPO price

Golden Agri-Resources (GGR) posted a 1Q22 core net profit of US$145m, which
accounted for 34%/29% of our/consensus’ full-year forecasts. We consider the 1Q results
to be above due to stronger-than-expected CPO price. The group’s core net profit is
US$43m lower against its reported net profit as we stripped off the forex gain of US$26m,
net gain on biological asset of US$14m and deferred tax income of US$3m.

Plantation segment is the key earnings driver

1QFY22 core net profit grew 207% to US$145m due mainly to higher CPO price achieved
(+42% yoy to US$1,303 per tonne). The higher CPO price more than offset the lower FFB
output (-20% yoy) and higher cost of production (+6.7% to US$304 per tonne) in 1Q22.
The group revealed that the 20% yoy decline in FFB output in 1Q22 was due to high
production base experienced in 1Q21, higher rainfalls, as well as replanting of older
estates. On a qoq basis, 1QFY22 core net profit fell 23%, which we gathered is due to
lower profit from its downstream division. This could be due to export restrictions on
Indonesian palm oil via the Domestic Market Obligation ruling from 27 Jan-18 Mar 2022.

Downgrade to Hold as positive news priced in

GGR maintained its guidance for 5% FFB output growth in FY22F, which assumes 2H22F
production will pick up significantly against the weak 1Q22 output. It expects costs of
production to rise 10-15% in FY22F due to higher fertiliser and labour costs; its fertiliser
and labour costs formed 45% and 27% of its total cost of production in FY21, respectively.
GGR revealed that it managed to lock-in 1H22 fertiliser cost at 10% higher vs. 2021 costs.
However, 2HFY22 fertiliser costs could go up by 60% yoy at current fertilisers prices, and
it has not procured its fertiliser requirements for 2HFY22. The group revealed that it has
reduced processing of third-party fruits following the export ban of palm oil by the
Indonesian government and it has enough storage capacity to store its own palm oil
production; however, the export ban is likely to impact cashflow and raise logistic costs, if
prolonged, due to the inability to export. GGR is hopeful that the export ban will be lifted
soon and cited some expectation in market for the ban to be lifted as early as 23 May
2022F. We lift our FY22F EPS forecasts by 13% to reflect our recently revised higher CPO
price assumptions but cut FY23-FY24F earnings on higher operating costs. We lower our
TP to S$0.30 as we raise our discount to its SOP to 20% from 10% to reflect concerns over
the ongoing palm oil export ban, as well as our view that CPO price could trend lower in
2H22F. We downgrade GGR from Add to Hold due to concerns that the policy to control
cooking oil prices in Indonesia will negatively impact profit margins for its estates.