Here’s What You Need To Watch With Golden Agri-Resources Ltd

Ser Jing - Golden Agri-Resources First Quarter Results (pic)

With more than 470,000 hectares of planted area, Golden Agri-Resources Ltd (SGX: E5H) is one of the largest oil palm plantation owners in the world. To put that into perspective, the size of Singapore’s land area is only about 71,000 hectares! Imagine having to maintain a plantation six times the size of Singapore – it must be a huge logistical challenge.

With the release of its second quarter results yesterday evening, here’s what investors really need to watch with regard to the company’s business going forward.

But first, let’s go through the operational results for the first half of 2014

In terms of sales volume, the company had seen healthy expansion in its palm-oil related business even as its oilseeds operations shrank. Its Plantations and Palm Oil Mills segment had seen total volume growth of 16% year-on-year to 1.426 million tonnes of crude palm oil (CPO) on the back of a better production rate. The Palm and Laurics segment also improved its processing volume by 30% year-on-year to 4.02 million tonnes. Oilseeds, as mentioned earlier, was the disappointment as volume dropped by 26% to 637,000 tonnes; Golden Agri had faced overcapacity in China and the company had scaled down its utilisation rate in the country to management costs.

The change in revenue for the 3 segments was roughly in line with how their sales volume had changed and resulted in a 27% increase in total revenue to US$3.95 billion for the company. But as the company faced much higher raw material costs for the downstream portion of its business, its net profit had decreased by 17% to US$131 million.

The main areas of concern

One main area of concern for investors to watch is the age profile of Golden Agri’s palm trees. Compared to the beginning of 2014, trees which are older than the prime age of production had moved up from 27% of total planted area to 34%. Palm trees enter their prime production age between the ages of 7 and 18. As Golden Agri removes the older trees and replants young ones in their place, the company might experience a few years of lower profits as the trees will take up to seven years to mature into the prime age profile.

Balance sheet

Golden Agri’s balance sheet has remained relatively stable since the beginning of the year with the net debt (total debt minus total cash) to equity ratio increasing only slightly from 0.23 to 0.26.

Moving forward

Golden Agri remains confident about its palm oil business as it believes in the long-term demand for its products. However, as the issues of overcapacity in the oilseed industry in China does not seem to be improving anytime soon, the company is reviewing its strategy in China for that segment of its business.

Besides possible changes to its oilseeds business, investors might want to watch out for those aging trees the company has, as I’ve mentioned earlier.

For a company of Golden Agri’s size, there are always areas for improvement.

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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 Stanley Lim doesn't own any shares of companies mention above