Would Benjamin Graham Buy Indofood Agri Resources?

Indofood Agri Resources Limited (SGX: 5JS) is a vertically integrated agribusiness model.

This means the company’s activities span the entire supply chain: from cultivating and producing palm oil to refining and branding cooking oil, margarine and other palm oil derivative products.

However, being a company focused primarily around palm oil and its derivatives can be perilous. Indofood can be at the mercy of palm oil prices, which are down by around 25% year to date.

Unsurprisingly, Indofood finds its share price down by a similar percentage compared to last March. It is currently down around 25% from 98 cents a share to its current price of 75 cents.

This fall has left the company priced at less than 70% of its book value – a book value that had been steadily growing over the last few years. This could be a sign that the company holds the potential of significant value for investors.

The company’s earnings yield of 7.6% suggests something similar.

Whilst palm oil prices might have fallen of late, the company has still managed to maintain top-line growth. The effects of palm oil prices may, however, be one factor behind the squeeze on Indofood’s net income as it hits profit margins.

Not paying a decent dividend – currently only 0.7% – may deter a value investor such as Benjamin Graham. However, from the company’s perspective this could be justified, as they seek to reinvest profits to make the most of growth opportunities.

Investors should also look at the company’s debt. Its leverage ratio of 41% isn’t excessive. But what could be worrying is the current ratio, which is at a value just below one. This means that Indofood has more current liabilities than current assets.

Indofood seems cheap on some measures. In particularly its earnings yield and price-to-book. This could please value investors, as palm oil prices have not been particularly kind of late.

However the company’s liabilities add a layer to the risk involved and could deter some.

The Motley Fool's purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock -- Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock -- Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.