Three Things To Like About Golden Agri-Resources

Ser Jing - Golden Agri-Resources First Quarter Results (pic)Palm oil producers such as Golden Agri-Resources (SGX: E5H) are not having the best of times right now. Margins are not what they used to be as global economic conditions shift the balance between supply and demand in the favour of buyers.

As a price taker, Golden Agri-Resources has to accept the going rate for the multi-purpose commodity. And right now, the going rate is not that great. But perversely, that is the first thing to like about Golden Agri-Resources. It is a typical cyclical business – its fortunes are tied to the way that the economy moves.

Peter Lynch, an investor who knows a thing or two about cyclicals, believes that investors need to think differently when looking at cyclical companies. He said that with most stocks, a low valuation is a good thing, but not with cyclicals. In fact, a high price-to-earnings ratio, which with most stocks is a bad thing, may be good for cyclicals.

Currently, Golden Agri-Resources is valued at more than 20 times earnings, which was last seen in 2007, shortly before the shares climbed to a high of S$1.12.

Another thing to like about Golden Agri-Resources is its wide geographic diversification. Around a quarter of annual revenue is generated from China, which is still expected to grow at a blistering pace this year. India, Indonesia and Europe together account for another third of the company’s revenue, while the Rest of Asia accounts for the remainder.

The company’s valuation relative to its book is the third thing to like about Golden Agri-Resources. Four years ago, investors were paying slightly more than what the company was actually worth in terms of its net assets. The price-to-book valuation fell to 0.8 in 2011 and is current at 0.6. At the current valuation it could mean that the market might be underestimating the assets of the business.

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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 Director David Kuo doesn’t own shares in any companies mentioned.