A Blue Chip Need Not Have The Better Fundamentals: Golden Agri-Resources and First Resources Shows Why That’s So

In Singapore, the constituents of the Straits Times Index (SGX: ^STI) are 30 of some Singapore’s largest publicly-listed companies. These companies are also normally considered as blue chips and that tends to confer a positive connotation onto their business fundamentals.

In fact, it’s been my anecdotal observation for a while that investors in Singapore tend to think of the index’s constituents as having more robust business fundamentals as compared to the rest of the market.

But, that’s not always true. We only have to take a look at palm oil producers Golden-Agri Resources (SGX: E5H) and First Resources (SGX: EB5) – the former’s part of the Straits Times Index while the latter isn’t – to see why that’s so.

The two companies might not be clones of each other, but they are similar enough. Golden Agri has 471,000 hectares of planted oil palm plantations in Indonesia with crude palm oil and unbranded refined palm products accounting for a total of 73% of its overall revenues in 2013. First Resources, on the other hand, has around 170,000 hectares of oil palm plantations in Indonesia and generated 74.2% of its total sales for 2013 from plantations and palm oil mills with the rest coming from refinery and processing activities.

So, with a broad brush, Golden Agri and First Resources could be looked at as similar palm oil producers with significant operations in Singapore’s southern neighbour, Indonesia. But, if we were to take a closer look at the two company’s operational results over the past five years, the similarities end.

Just take the chart below, which showcases how the net income and operating cash flow of the two companies have changed since 2008. And from the chart, it’s quite clear which company has had much stronger growth historically (hint: it’s not Golden Agri!).

Source: S&P Capital IQ

And that’s not all. First Resources has also been able to achieve its growth with a balance sheet that’s much cleaner than that of Golden Agri as the former has had a much higher ratio of total cash to total debt over the past few years as compared to the latter.

Source: S&P Capital IQ

These two companies are involved in the same industry and have similar businesses. But what we have is a blue chip (Golden Agri) that has the weaker business fundamentals in terms of its historical growth rates and balance sheet strength as compared to a share outside the index.

With Golden Agri and First Resources, we can see that there are times when investors might want to compare a blue chip with its industry-peers that are outside a prestigious market index when trying to gain exposure to a particular industry or sector. Though, it must be noted that I’m certainly not making any recommendations in regard to both palm oil producers.

All told, it’s not always the case where an index constituent would have the stronger business fundamentals and that’s an important point for investors to consider when making an investment. Bigger isn’t always better.

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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.