A good start to the year
• 1Q22 results beat expectations
• Targeting FFB to grow 5% YoY
• Higher cost of production
1Q22 business update – GAR’s 1Q22 revenue rose 32% YoY to USD2.7b while net profit jumped more than fourfold to USD188m, driven by both upstream and downstream businesses on the back of higher CPO prices. Despite lower palm product output (- 18% YoY) from the upstream business, this was more than offset by higher CPO (+49% YoY, averaging USD1579 per tonne). Production in 1Q22 was impacted by rainfalls, old estates being prepared for replanting, along with a high base effect in 1Q21. Management maintains their guidance of 5% YoY growth for fresh fruit bunches (FFB) production, implying a strong pick-up of production in 2H22.
Cost of production expected to grow by 10-15% YoY in 2022 – Cost of production rose 6.7% YoY to USD304 per tonne in 1Q22, mainly due to higher fertiliser costs. GAR managed to procure fertiliser at prices which were 10% YoY higher for 1H22 but has not procured its requirement for 2H22. We could see fertiliser costs increase ~60% YoY for 2H22. For 2022, cost of production is expected to rise 10-15% YoY.
29% of its export from Indonesia was impacted by the ban – Management expects the export ban imposed by Indonesian government to be temporary given ample supply of production vs domestic demand and cited some market expectation that the ban could be lifted as early as 23 May 2022. We note that ~29% of its export from Indonesia was impacted by the ban. GAR has sufficient storage capacity for its palm oil production for ~3 months but could see higher costs from storage and logistics. After adjustments, our fair value estimate decreases slightly from SGD0.32 to SGD0.30.
ESG Updates
GAR’s ESG rating was unchanged in Mar 2022. Evidence shows that GAR has continued to strengthen its oversight of the palm oil supply chain through satellite monitoring of deforestation. According to research, GAR however lags its peers on environmental issues with limited evidence of management practices to address carbon emissions with no disclosed carbon reduction targets. In addition, GAR demonstrates limited efforts to manage water usage. Moreover, GAR ranks lower than its global peers on governance and social issues. Evidence shows that GAR’s supply chain labour policies and practices appear to lag peers and there is no evidence of compliance audits. HOLD. (Chu Peng)