• Golden Agri Resources (GAR) has released its 2QFY19 results. The group’s core net loss of US$15.0mil in 1HFY19 fell short of consensus estimates of a core net profit of US$79.4mil for the full year.

• GAR expects its FFB production growth to be zero in FY19E after a 3% YoY decline in 1HFY19. The group’s FFB yield shrank by 2% YoY to 9.4 tonnes/ha in 1HFY19 due to biological stress after two years of bumper harvest. The fall in FFB production in 1HFY19 took place mainly in Central Kalimantan.

• GAR expects FFB production to pick up in 2HFY19. 2H is expected to account for 55% of its full year’s FFB production while 1H is envisaged to make up 45%.

• We understand that the weather at GAR’s oil palm estates in Sumatra has been hot in the past two months. So far, weather conditions have not improved. It is possible that the dry weather may continue leading into an El Nino in 2020F.

• So far, less than 0.01% of GAR’s oil palm estates has been affected by forest fires. We gather that the fires, which were mainly in West Kalimantan, started outside and then spread into GAR’s oil palm estates. Most of the forest fires were caused by third parties opening up land for development. In some instances, individuals were careless in throwing away cigarette butts and using fire to cook. To prevent forest fires in the future, GAR is focusing on educating school children. For example, the group has published booklets on forest fires for school children.

• GAR’s Liberia unit is making losses as operating conditions are challenging. Together with other planters in Liberia, GAR is engaging with the government to improve infrastructure and labour regulations. GAR’s unit has planted areas of 19,000ha in Liberia.

• We understand that it may be difficult implementing the B50 policy in Indonesia. Anything more than a 30% blend of palm oil in diesel may require either a change in the engines of vehicles or a different biodiesel production process. A different biodiesel production process may be more expensive. We gather that the palm industry in Indonesia has proposed using biodiesel in the power industry if B50 cannot be implemented. Recently, the Indonesian government said that B50 may be implemented at the end of 2020F.

• Currently, GAR’s biodiesel plant, which has a capacity of 600,000 tonnes per year, is operating at full capacity. About 85% of GAR’s biodiesel are sold and used locally while the balance 15% are exported mainly to China.

• GAR hopes to achieve a CPO cash cost of US$300/tonne in FY19E. The group’s cash cost rose to US$311/tonne (RM1,281/tonne) in 1HFY19 from US$303/tonne (RM1,192/tonne) in 1HFY18. The YoY increase in GAR’s production cost in 1HFY19 was mainly due to a drop in CPO output and a 10% rise in fertiliser costs.

Source: AmInvest Research - 16 Aug 2019