At What Price Would Benjamin Graham Buy Golden Agri-Resources?

Value investing is about buying something for less than its intrinsic worth. Unfortunately there is no simple, one-size-fits-all way of working out what a stock is worth.

Every investor has their preferred method for determining intrinsic values.

Thus with several potential measures of value, one company might appear overvalued to one investor but undervalued to another.

Applying a set of criteria similar to that used by Benjamin Graham to gauge the value of a stock to Golden Agri-Resources (SGX: E5H) highlights how this disparity in opinions can arise.

With a P/E ratio of around 17, the palm oil producer is more expensive than the Singapore stock market. But compared to the wider market, the company’s earnings yield of 5.8% is more than twice the risk-free return available.

If we are willing to settle for an earnings yield of as low as 5% then there is room for Golden Agri-Resources to grow 16% from 44 cents a share to 51 cents and still remain under-priced on this metric.

With less than a-third of earnings finding its way to investors in the form of dividends, a different story can be found by using the dividend yield as a measure of value.

The dividend yield of 2% is lower than 10-year US Treasuries. Investors placing greater importance on this measure would hope to see the share price fall 15% to below 37 cents a share before considering it undervalued.

Arguably the most useful measure of value is the price-to-book ratio. Golden Agri-Resources is priced below its book value by 50%. This would allow the share price to nearly double to 87 cents before the company would start to look overvalued.

Whilst this may make Golden Agri Resources look undervalued, it is always important to ask why a company is priced so low. In the case of Golden Agri Resources, it might be because it is a risky investment.

The company has total debt standing at three times the company’s book value. A current ratio of 1.46, which is below the target value of 2, also casts doubts.

Worryingly, could be the sharp declines in net income between 2011 and 2014. During this period, the bottom-line fell 84% from over S$1.6b to just S$330m. Perhaps there is good reason for Golden Agri Resources to appear so cheap.

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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 Adam Kuo doesn’t own shares in any companies mentioned.