• Golden Agri Resources (GGR) (UNRATED) has released its 2QFY20 results. The group’s core net loss of US$11.0mil in 1HFY20 fell short of consensus estimates of a core net profit of US$25.0mil for the full year.

• GGR’s core net losses narrowed to US$11.0mil in 1HFY20 from US$15.0mil in 1HFY19 while revenue expanded by 7% to US$3.4bil. Average CPO price realised grew by 24% to US$616/tonne (RM2,618/tonne) in 1HFY20 from US$496/tonne (RM2,043/tonne) in 1HFY19. On a negative note, GGR’s FFB production shrank by 8.0% YoY in 1HFY20.

• GGR expects its FFB production to decline by 5% in FY20E. The recovery in FFB output has already started in August 2020. Peak FFB production is expected to take place in 4QFY20.

• So far, there are no issues with the weather at GGR’s oil palm estates in Indonesia although there was excessive rainfall on certain days. Also, there have been fewer hotspots and fires in Indonesia so far this year compared to last year. GGR does not expect an excessively dry season this year. GGR will only provide guidance on its FY21F FFB production growth at the end of the year.

• GGR’s cash cost of CPO production was US$308/tonne (RM1,309/tonne) in 1HFY20 vs. US$311/tonne (RM1,281/tonne) in 1HFY19. The group expects its cash cost to be US$300/tonne in FY20E, which is the same as FY19.

• We understand that palm purchases by the major buyers such as India and Pakistan have normalised. However, the logistics or buying pattern has changed. At times, certain ports would shut down due to a Covid-19 outbreak. Sometimes, companies issuing letters of credit to customers would halt operations temporarily as there is a Covid-19 infection. Hence, GGR has to be flexible with options to rework the supply chain. For example, GGR would reroute its orders from its refineries if there are problems at the destination ports.

• We gather that currently, there are discussions on ways to continue funding the Estate Crop Fund, which subsidises Indonesia’s biodiesel policy. There is risk that the fund would run low on cash in FY21F. Due to the huge price gap between diesel and CPO, large subsidies are needed to finance biodiesel.

• The problem may become more acute if Indonesia proceeds with the implementation of B40 biodiesel policy in FY21F. Currently, Indonesia is implementing B30. An issue is that the Indonesia government cannot continue raising the CPO export levy (this goes to the Estate Crop Fund) as it would hurt the upstream players, especially the smallholders. Recall that in 1HFY20, Indonesia raised the CPO export levy to US$55/tonne from US$50/tonne to raise funds for the Estate Crop Fund.

Source: AmInvest Research - 17 Aug 2020