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Another Dismal Quarter For Golden Agri-Resources

Ser Jing - Golden Agri-Resources First Quarter Results (pic)Palm oil producer Golden Agri-Resources (SGX: E5H) endured a dismal third quarter as its earnings, released yesterday evening, showed a decrease in both its top and bottom-line. This follows a poor second quarter for the company where its profits got slashed by 60% compared to a year ago.

The Indonesian-based GAR is the second largest palm oil plantation company in the world with a total planted area of 467,014 hectares as of 30 Sep 2013. In addition, it also manufactures edible oils and fats that are made from the palm fruit.

GAR’s also focused on sustainable palm oil production and has released extensive reports that detail its efforts and progress on that front.

Some basic numbers

For the quarter ended 30 Sep 2013, revenue fell 6% year-on-year to US$1.57b while profits got slashed by 65% to US$30.2m.

The company’s top-line had shrunk mainly due to lower average Crude Palm Oil (CPO) prices, which have fallen by 19% since last year.

Meanwhile, profits were affected by a 13% decline in palm-product output and generally weaker selling prices for its products.

Lower selling prices for its palm-based products are not within GAR’s control and is a problem faced by industry peers like Indofood Agri Resources (SGX: 5JS) as well. The latter reported its third quarter earnings recently and also faced falling average selling prices for its key crops, which includes palm.

GAR has declared an interim dividend of 0.585 Singapore cents per share, a decrease of 2.5% from the pay-out of 0.60 Singapore cents in the corresponding period a year ago.

Operational highlights and the balance sheet

As mentioned earlier, GAR ended the quarter with a total planted area of 467,014 hectares (ha), a 1.6% increase from a planted area of 459,502 ha in the previous year.

The mature planted areas on the other hand, have grown 3.2% year-on-year from 418,137 ha to 431,612 ha. Mature plantations generally have better yields, so the change in mature planted areas would be something for investors to note.

In addition, GAR’s estate has a “favourable age profile with an average age of 13 years” and can support the company’s production growth in the near to medium term.

The company has also expanded its downstream production capacity in Indonesia as the sales volume of refined products (products derived from palm) grew 58% year-on-year for the nine months ended 30 Sep 2013.

GAR’s balance sheet has weakened somewhat compared to a year ago as its net debt (total debt minus cash) to equity ratio has increased from 10% to 20%; total debt has increased from US$1.37b to US$2.44b while cash on hand only grew from US$499m to US$699m.

What’s next for Golden Agri-Resources

In the earnings press release, the company iterated its growth strategy:

GAR’s growth strategy is to expand its plantation hectarage and milling capacity; as well as its downstream capacity and supporting facilities, and is extending distribution and logistics capabilities to reach out to more end users in our destination markets.”

In addition, GAR “remains positive on the outlook of the palm oil industry, on the back of robust long-term fundamentals of the sector. Demand for palm oil will continue to grow, supported by strong primary demand for edible oils, increasing need for substitution to palm oil, as well as alternative uses such as oleochemicals, specialty fats and biodiesel.”

But while the company sees its future tail-winds coming from long-term secular growth trends in oil palm demand, investors ought to know that in the near-to-medium-term, commodity prices can be extremely volatile.

And GAR, whose business is almost solely built on palm oil, sees its share price tethered to CPO prices, as exemplified by the chart below:

Source: Google Finance (for Golden Agri’s share price) & Indexmundi (for CPO prices)

Source: Google Finance (for Golden Agri’s share price) & Indexmundi (for CPO prices)

For close to six years since the start of 2008, GAR’s shares have fallen by more than 43% to its current price of S$0.565, largely driven by a decline in CPO prices. In contrast, the general market, as represented by the Straits Times Index (SGX: ^STI), has been largely flat.

So, while the secular growth trends in palm-oil demand might indeed play out and benefit GAR, investors have to be aware of the risks of painful shorter-term losses and foregone opportunities based on the historical correlation of the company’s share price with that of CPO prices.

Valuation

Shares of GAR are currently exchanging hands at S$0.565 per share. At that price, the shares are valued at around 24 times trailing earnings and carry a dividend yield of 2.1% based on its pay-out last year.

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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 Chong Ser Jing doesn’t own shares in any companies mentioned.