Golden Agri-Resources Ltd: Prudent strategy for 2009

FY08 results slightly disappointing. Golden Agri-Resources (GAR) saw its FY08 revenue rise 59.4% to US$2985.9m (8.6% > our estimate), and while core net profit (excluding bio-asset fair value gains) rose 32.0% to US$376.8m (11% < our full-year figure). GAR did not declare a final dividend (versus 0.5 S cent in 2007) in an effort to conserve cash in these uncertain times. Instead, it plans to reward shareholders with a bonus issue (1 bonus share for every 25 shares held), and it will capitalise US$10.0m to its share premium account. According to management, the bonus issue works out to an equivalent cash dividend of 1.0 S cents/share, assuming investors can sell the bonus shares at S$0.25 each.

Prudence rules in 2009. Going forward, GAR expects the operating environment to remain challenging in 2009, given the still uncertain economic outlook and volatile commodity prices. And on its part, GAR will strive to manage its costs as well as focus its growth on the sale of various palm- based products to selected key regions in China. Other prudent measures include maintaining a strong balance sheet (net gearing just 0.09x) and careful spending. For 2009, GAR expects to cap its capex to US$200m (versus US$244m in 2008), where it will cautiously expand its oil palm plantations (includes building new mills) and add to its downstream processing/refining capacity to support its plantation operations.

Worst may be over. Meanwhile, we believe that the worst may be over. For one, GAR should benefit from the easing fertiliser prices, although we expect the bulk of the impact to come in 2Q09. Secondly, management believes that its CPO production should increase by around 7-10%, aided by its recent new planting as well as easing tree stress (typically lasts about two years). We have correspondingly raised our FY09 revenue estimate by 4.3%. Although CPO prices have been pretty stable around the current levels for some time now and CPO demand has remained fairly stable, we note that the biggest price influence is actually weather and its impact on all the edible oil crops - is probably the hardest to predict.

Maintain HOLD. So barring a strong recovery in crude oil prices and the global economy, we see no pressing need to raise our conservative US$500/ ton CPO assumption yet. Hence we maintain our HOLD rating and S$0.30 fair value (based on an undemanding 6x FY09 PER). We would turn buyers closer to S$0.20.

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SembCorp Industries: Goldilocks report card

SembCorp Industries’ (SCI) revenue was up 15.2% y-o-y to S$9.9b in FY08, but its recurring net profit was down 4.2% y-o-y to S$534m, lower than our estimate of S$539m. We believe that SCI’s supposedly resilient Utilities business may be at risk of customers shutting down operations or asking for more rebates, should the economic downturn and credit crunch persist. We have cut net profit estimate by 7.7% to S$509m in FY09, and fair value to S$2.00. SCI has cut its dividend payout ratio from 50% to 39%, DPS at 11cts for FY08 translating into dividend yield of 5.1%.

Net profit is below expectation. SCI had S$9.9b revenue (+15.2% y-o-y) and S$507m headline net profit (-3.6%) in FY08. SCI’s earnings were held up by higher net profits from its Marine business (+32% y-o-y), which mitigated the weaker results from Utilities (-13%), Environment (-84%), and Industrial Parks (-7%) businesses. SCI’s recurring net profit was down 4.2% y-o-y to S$534m in FY08, vs. our estimate of S$539m.

Utilities business’ outlook to remain soft in 2009. We believe that SCI’s supposedly resilient Utilities business may be at risk of customers shutting down operations or asking for more rebates, should the economic downturn persist. Indeed, SCI highlights that one customer in the UK is now considering cessation of production. While SCI would mitigate the risks through realigning of resources to meet customers’ needs under its centralized utilities model, we project 10% y-o-y dip in Utilities’ net profit to S$181m for FY09, on the back of S$4.2b (-6% y-o-y) revenue projection.

SCI declares 11 Scents dividend per share. We have cut net profit estimate by 7.7% to S$509m in FY09, and fair value to S$2.00 (vs. S$2.39 previously). The lower fair value is largely due to the use of market value (vs. target price previously) for listed subsidiary, SembCorp Marine, in our SOTP methodology. SCI declares 27% y-o-y lower dividend per share of 11 Scents for FY08, implying 39% dividend payout ratio (vs. 50% in FY07).

UOB - Disappointing results due to high impairment charges

UOB’s 4Q08 net profit of $332m (-30% qoq, -34% y/y), was below expectations. Earnings disappointed mainly due to huge impairment charges taken in the quarter. However, the group’s business remains strong operationally, as operating profits recorded double-digit growth led by resilient net interest income and tight cost controls.

Weak fee-based income, which fell by 38% yoy, was offset by the resilient lending business and a $92m net gain from trading and investment activities. Net interest income grew on the back of margin expansion and loans growth across regions. Going forward, we remain upbeat on UOB’s lending business as it will be one of the key beneficiaries of the government’s recent initiatives to boost SME lending.

Impairment charges in 4Q08 more than doubled to $381m due to specific losses on loans and debt securities from overseas. At the same time, higher collective impairments were provided to buffer against the global economic uncertainty. While impairment charges are set to rise, the management is confident to survive the downturn as stress tests indicates that their portfolio are resilient. Moreover, with a strong CAR that was well above regulatory requirements, the management sees no compelling reasons for capital raising at this juncture.

Book value has shrunk from $10.91 to $8.90 over the year, mainly due to a near $3bn decline in available-for-sale reserves. Any further mark-to-market losses of its investment-grade bonds investments (which is worth some $16b) that will be taken into the reserves could continue to reduce the book value in the near-term.

We have lowered our FY09 and FY10 earnings estimates by 5-9% to reflect higher provisions. Our target price is cut to $9.10 based on FY09 book value per share (assuming lower magnitude of mark-to-market losses in 2009). The group recommended a final dividend of 40 cents per share, in line with its regular dividend payout. UOB’s earnings remain at risk as credit deterioration deepens. Maintain Hold.