Golden-Agri Resources Ltd Is Near Its 52-Week Low: Is It An Opportunity For Investors?

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

Palm oil is one of the largest exports in Southeast Asia. Even on a global scale, Malaysia and Indonesia dominates the palm oil industry, with the majority of the world’s supply of the commodity coming from the two countries. 

Within the industry itself, Golden Agri-Resources Ltd (SGX: E5H) would be a prominent player as it happens to be one of the largest plantation owners in Indonesia. Yet, it feels that there is little love for this company among investors, with its share price having dropped by 20% in the past 3 years since September 2011.

At its current price of S$0.515, it is hovering just above its 52-week low ofS$0.50, with a price to book ratio of 0.6 times. So, what might be wrong with Golden Agri and could it be an opportunity for investors?

Three reasons for weaknesses

Since Golden Agri is a commodity company, its share price has a strong correlation with the price of its underlying commodity, crude palm oil (CPO). With CPO prices on a steady downward trend since the start of 2011, it’s perhaps no surprise to see Golden Agri’s share price tag along.

That said, if the company’s corporate performance had been strong, Golden Agri’s share price might just be able to pull away from the gravity of CPO prices. But sadly, due to overcapacity in its oilseeds sector in China and margin compression in its palm and laurics sector, the company saw a 17% drop in its net profit in the first half of 2014. In fact, its profit had dropped from US$1.27 billion in 2011 to just US$284 million in the last 12 months.

These two factors above – strong price correlation with CPO prices and poor corporate performance – likely had caused Golden Agri’s share price to slide to where it is now.

On top of that, there is also some serious legislative risk for the company. Indonesia is currently discussing a bill that could restrict foreign ownership of plantations to no more than 30%. If the bill is passed, Golden Agri’s operations might be disrupted as it would need to readjust its corporate structure to fulfil the new legal plantation ownership requirements.

Are these long-term issues?

When it comes to reviewing companies facing difficulties, it’s important to understand if the challenges are structural or cyclical in nature; the former can be fatal for a company while the latter gives a company a much higher chance of recovery.

It’s quite obvious that the legislative risk confronting Golden Agri might lead to a structural change in its business. However, it is still too early to assess the real impacts of the bill if it gets passed. As for other two issues, it seems that CPO price swings and Golden Agri’s current poor corporate results are cyclical in nature. The issue is that the timing on the upswing can be tricky. When would CPO prices recover? When would the situation of overcapacity in Golden Agri’s oilseeds sector be resolved? Those are very tough questions to answer.

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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 shares in any companies mentioned.