- 3Q12 core profit came in at S$12.2m (-53% y-oy); below expectations
- Cut FY12F-14F profit by 19-23% after imputing lower rubber prices and SIAT associate earnings
- Maintain HOLD; TP maintained at S$0.125 after rolling over valuation base to FY13
3Q12 PATMI below expectation. GMG Global reported 3Q12 core earnings of S$12.2m (-53% y-o-y; +6% q-o-q). 9M12 profit is S$35.4m or only 64% of our full year forecast, which means annualised profit is below expectation. 3Q12 profit halved y-o-y because ASP fell 34% (-20% q-o-q) to S$3,726/MT as rubber prices corrected in the quarter. This offset the 47% y-o-y growth in sales volume to 81,664 MT, which was driven by growth at Teck Bee Hang and initial contributions from ITCA and SIAT. Also, the S$3.8m earnings from new SIAT associate were below our S$6.3m estimate because we underestimated SIAT’s cost base.
Cut FY12-14F earnings by 19-23%. We cut earnings after imputing lower rubber prices (3-12% lower than our previous estimates given weaker
projected global rubber demand) and reducing SIAT Group associate contribution given weak YTD performance. Our DCF-based TP is maintained at S$0.125 after we rolled over valuation base to FY13.
Maintain HOLD. GMG is expected to report weak earnings again for 4Q12 (lagged impact of falling rubber prices in 3Q12), so we choose to remain cautious. Our HOLD recommendation is thus retained.
Downward trend in profits continue
GMG Global reported y-o-y profit contraction for the third consecutive quarter. 3Q12 core profit fell 55% y-o-y to S$12.2m, taking 9M12 earnings to S$35.4m or only 64% of our previous full year forecast.
The y-o-y earnings was caused by a 34% drop in ASP to S$3,726/MT (-20% q-o-q) as rubber prices corrected in the quarter. Also, initial contribution from the new SIAT associate was only S$3.8m for the quarter vs our S$6.3m estimate (we had underestimated SIAT’s cost base).
Strong sales volume growth
Despite disappointing earnings, GMG’s sales volume surged 47% y-o-y to 81,664 MT. Growth was mainly driven by Teck Bee Hang, GMG’s Thai processing business which was able to source more rubber following the recapitalisation of its balance sheet earlier in the year. In addition, GMG benefited from initial contribution from ITCA (acquired Ivory Coast processor in Dec11) and recently acquired SIAT Group (West African rubber cultivator).
However, gross margins continued to trend down as contribution from processing rose. 3Q12 gross margins stood at 10.8% compared to 13.1% in 2Q12 and 15.3% in 3Q11.
Balance sheet remains strong
The group remains in strong financial position with S$9.6m net cash, albeit down from S$290m at 30Jun 12 as GMG had completed the purchase of 35% stake in SIAT in the quarter.
Cut CY12F-14F natural rubber prices
We cut CY12F/13F/14F natural rubber prices by 12%/4%/3% on the back of slower-than-expected demand recovery. Our revised assumptions for TSR20 are now US$3,188, US$3,493 and US$3,448/MT. The price weakness in 1H12 had trickled into 3Q12 as the slowdown in Europe and US economy is starting to affect China. The latest estimates from IRSG (International Rubber Study Group) revealed that Chinese demand had fallen 0.4% y-o-y in 3Q12 after healthy 10.8% in 1Q12 and 6.5% growth in 2Q12. We also took into account higher stock usage ratios as YTD output has exceeded our estimates.
Looking into 2013, we expect rubber prices to stage a mild rebound on the back of a recovery in demand for replacement tyres (53% of total rubber demand).
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