Why Golden Agri's earnings may still disappoint next year

Pressure on CPO price lingers.

According to Macquarie Research, 2014 will likely be another weak year, earnings downgrade cycle not over yet.

Given the weak fundamental outlook for edible oils and CPO for 2014 and given that consensus is still pricing in CPO at RM2,700/t, of the view that the earnings downgrade cycle for the sector is likely to continue and that the sector will continue to underperform over the next 12 months.

KL Kepong, Golden Agri and Astra Agro Lestari are it key Underperform ideas.

Here's more:

We are cutting our 2013-17E EPS by 14% on the back of the CPO price cuts outlined in this report. Our price target drops by a similar amount to S$0.44 from S$0.50. With -14% total return forecast, we downgrade Golden Agri (GGR) from Neutral to Underperform.

We believe that ongoing shortfalls versus consensus will cause the shares the trade below the S$0.50 ‘hard deck’ that has served as a resistance level over the last four years. We are ~17% below consensus for 2013 and 2014.

We think the gap between our estimates and consensus continues to be on operating margins, as shown in Figures 4 and 5 below.

We think consensus operating margins do not reflect the likelihood of a flattish CPO price environment over the next 12-18 months, or the rising share of lower margin mid and downstream revenues within GGR’s revenue split.

For the uninitiated, GGR reports a revenue split by division and geography. On the profit side, GGR only reports the split by geography though.

This is less useful, as the bulk of its operations are in Indonesia (~80% of revenues), and these range from high margin upstream to lower margin mid and downstream activities. The remaining ~20% of GGR’s revenues come from mid- and downstream activities in China.

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