Is the worst finally over for loss-making Golden Agri?

Earnings are unlikely to rebound this year.

Golden Agri posted a net loss of $23.5 million in 2015, hurt by flagging crude palm oil (CPO) prices and a hefty US$197.7m revaluation loss due to the change in accounting treatment for its biological assets.

Analysts warn that 2016 could prove to be another disappointing year for the agribusiness giant, particularly after the company guided that fresh fruit bunch (FFB) production could drop by 8% to 10% as drought bites.

“For 2016, GAR expects to see lower production (fall of 8-10%) due to the El Nino effect; but the impact will be mitigated by expected higher CPO prices, along with support from the bio-diesel mandate,” said Carey Wong, equity analyst at CIMB.

While higher CPO prices could buffer the production drop, others warn that Golden Agri will have to grapple with higher expenses, which will put a lid on an earnings rebound.

“At its 4Q results briefing, GGR guided that 2016 FFB output could fall by 8-10%. This and higher labour costs could raise production costs by 11% to US$310/tonne,” said CIMB analyst Ivy Ng.
Higher expenses, coupled with financial impact from a change in accounting policies, will keep the group’s growth in check this year.

“The amendments to the IAS41 policy will raise the group’s depreciation charges by US$81m, or cut its FY15 core net profit of US$221m by 37%. This will also reduce the group’s plantation assets value in its book from US$7.8bn to US$1.2bn and shareholders’ equity to US$3.7bn in FY15. As a result, its gearing level will rise to 0.82x from 0.35x in FY15,” Ng noted.

“While we believe that the worst may be over, we do not see any near-term catalyst for a meaningful rebound in earnings just yet; not when crude continues to hover around US$30/barrel and a potential bumper crop is expected for substitute vegetable oils,” OCBC’s Wong said.