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Looking At Golden Agri-Resources through the Eyes of an Investing Master

For investing geeks (like me!), Peter Lynch is likely to be a familiar name. He etched his exploits into investing lore when he was the manager of the Fidelity Magellan Fund in the USA from 1977 to 1990. During that time, he managed to generate annualised returns of 29% a year, turning every $1,000 entrusted to him in 1977 into more than $27,000 by 1990.

How did he manage to do it? Fortunately for the investing fraternity, Lynch wasn’t a stingy man and he shared his philosophy and techniques in his books One Up On Wall Street and Beating The Street. In particular, the former contained a checklist that he had used to evaluate companies when he did his own investing research on them.

Without further ado, let’s see how the palm oil producer Golden Agri-Resources (SGX: E5H) would fare when looked at through Lynch’s checklist.

1) The Price-Earnings Ratio: is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

Shares of Golden Agri are currently exchanging hands at S$0.60 apiece and valued at 20 times trailing earnings. That’s around 50% higher than the market’s average PE of 13, as represented by the Straits Times Index (SGX: ^STI).

Golden Agri is the world’s second largest palm oil planation company and has significant operations in Indonesia with a total planted area of 471,000 hectares in Singapore’s southern neighbour as of 31 Dec 2013. Some of the company’s industry peers include other palm oil players like Indofood Agri Resources (SGX: 5JS), Wilmar International (SGX: F34) and First Resources (SGX: EB5).

Company

Price

Trailing PE ratio

Indofood Agri Resources

S$0.93

22

Wilmar International

S$3.52

14

First Resources

S$2.43

12

Straits Times Index

3,134

13

Golden Agri-Resources

S$0.60

20

Source: S&P Capital IQ

From the table above, Golden Agri-Resources’ valuation is a fair bit higher than some of its industry peers and that of the market.

2) What is the percentage of institutional ownership? The lower the better

The family of Golden Agri-Resources’ chairman and chief executive, Franky Oesman Widjaja, collectively owns half of the company with institutional investors (i.e. big money managers) having a total stake of around 20%.

In this regard, the percentage of institutional ownership is much lower than that of the company’s insiders.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

Over the past three months, there have been no purchases of Golden Agri-Resources’ shares from both itself and its insiders.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

The palm oil producer has been consistently profitable over the past 10 years, but its record of earnings growth hasn’t been smooth to say the least. The table below shows how Golden Agri-Resources’ earnings have changed over the years and we can see how widely its profits can change from year to year.

Year

Earnings per share
(US cents)

Year-on-year % change

2003

0.245

2004

0.726

196%

2005

2.584

256%

2006

5.216

102%

2007

11.74

125%

2008

12.49

6%

2009

5.251

-58%

2010

11.72

123%

2011

10.45

-11%

2012

3.296

-68%

2013

2.425

-26%

Source: S&P Capital IQ

5) Does the company have a strong balance sheet?

From its latest balance sheet, Golden Agri-Resources carries US$587 million worth of cash while having a much heavier total debt load of US$2.58 billion. That might make it seem like the company does not exactly have a strong balance sheet initially. But, a glance at its financial ratios gives a more nuanced picture.

Golden Agri-Resources’ debt to equity ratio comes up to 30%, which is a fair bit lower than the Straits Times Index’s average of around 75%. In that respect, the company’s balance sheet does not seem too weak.

6) Does the company have room to grow?

In Golden Agri-Resources’ latest earnings release, the company reiterated its confidence in the “robust demand growth of palm oil.” Franky Widjaja also commented that demand for palm oil could grow from the bio-energy sector, especially given the Indonesian government’s intention to increase the use of biofuels.

In terms of more company-specific trends, Golden Agri’s expanding its palm oil plantations and is in the process of “exploring new initiatives for cost efficiency such as mechanisation and alternative energy”. In addition, the company’s also building more downstream (i.e. consumer products derived from palm oil) processing capacity in strategic locations and would be expanding its distribution coverage and product portfolio.

To fulfil these growth aims, the company’s projecting investments of up to US$550 million on capital expenditures in 2014. Given this backdrop, it seems there’s indeed room for growth for the company.

Foolish Bottom Line

Golden Agri-Resources meets only three out of six criteria in Peter Lynch’s checklist with low institutional ownership, a relatively strong balance sheet, and more room for growth going forward. Does this mean the share does not represent a good investment opportunity?

Unfortunately, as useful as the checklist is, there’re still other important areas of consideration with the company (such as the competitive advantages it might hold over its peers within the palm oil industry, for instance) that investors ought to think about before any investing decision can be made.

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