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Palm Oil Prices Weigh on Golden Agri-Resources’ Results

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Golden Agri-Resources (SGX: E5H) just released its 2Q results on Friday evening after market close. The world’s second largest palm oil plantation company, Golden Agri-Resources (GAR in short), saw its top-line for the quarter increased by 25% from last year; however, net profits plunged 58% from US$108m to US$45m.

Let us take a look at the few factors which led to the fall in net profits despite the rise in revenue.

Golden Agri 2Q results

The main reason for GAR’s poor year-on-year performance was mainly due to a 25% decrease in average Crude Palm Oil (“CPO”) market prices. However, the fall in net profits was magnified by several different factors – Interest on borrowings swelled by 32% and foreign exchange losses widened to US$-14 million, a whopping 75% increase.

Currently, GAR operations are located in two countries – Indonesia and China. While the half year net profits from Indonesia fell 48% from US$269 million to US$ 141 million year-on-year; the performance at China operations improved tremendously as net profits jumped from US$1 million to US$ 17 million.

Despite the lower performance reported; GAR leads as the largest oil palm plantations company in Indonesia and is consistently expanding during the past few years. The age profile of GAR’s plantations remains favourable with an average age of around 14 years, providing a solid foundation for the Company’s near to medium term growth. In addition, GAR shows a robust financial position, evidenced by a low gearing ratio of 0.17 times as at 30 June 2013.

Outlook Ahead

Given that palm oil prices are expected to remain volatile, the growth strategy at GAR is to target on other areas within their control. It is focusing on the robust palm oil industry fundamentals by increasing its milling capacity; construction of downstream-processing capacity; and expansion of its distribution network and logistics facilities around the globe.

Mr Franky Widjaja, Chairman and Chief Executive Officer of GAR added: “We are of the view that industry fundamentals remain favourable in the longer term. Investing in the palm oil business is a long-term strategy and we will continuously strive to expand the size of our planted area and our downstream operations. As part of our value creation efforts, we also regularly evaluate acquisition opportunities.”

As of 4th August 2013, Golden Agri Resources’ shares are currently selling for $0.525 with a current Price-to-Earnings (P/E) ratio of 17.7168.  It provides a dividend yield of 2.2% based on last year’s full year payout.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in the companies mentioned.