Golden Agri-Resources Ltd’s Latest Earnings: What’s Next After A 84% Drop In Profit?

Golden Agri-Resources Ltd (SGX: E5H) reported its fiscal first-quarter earnings yesterday evening.

As a brief introduction, the company’s an integrated palm oil outfit with large oil palm plantations (a total planted area of 484,937 hectares) in Indonesia.

Financial highlights

Like most other palm oil producers in the region, the latest numbers from Golden Agri’s poor to say the least.

For the quarter, the company experienced an 18.9% year over year drop in revenue to US$1.55 billion. As a result of a weaker gross margin, Golden Agri’s gross profit shrank by 39.1% to US$237.1 million compared to a year ago.

Large foreign exchange losses and higher financial expenses, coupled with the lower revenue and weaker gross profit margin, heaped immense pressure on Golden Agri’s bottom-line in the quarter, with the end result being a whopping 83.5% fall in net profit from US$103.9 million a year ago to US$17.2 million.

Golden Agri ended the quarter with US$132.3 million in operating cash flow, US$84 million in capital expenditures, and thus US$48.3 million in free cash flow (operating cash flow minus capital expenditures). The selfsame figures a year ago were US$174 million, US$79 million, and US$95.5 million respectively.

The strength of the palm oil outfit’s balance sheet has also weakened somewhat compared to a year ago. As of 31 March 2015, Golden Agri had a leverage ratio (total assets divided by total equity) of 1.66 and net-debt to equity ratio (where net-debt refers to total borrowings minus total cash and short-term investments) of 0.29; a year ago, the selfsame ratios were 1.60 and 0.22 respectively.

Operational highlights

Golden Agri has three main business segments, namely Plantations and Palm Oil Mills, Palm and Laurics, and Oilseeds.

For the quarter, the first segment, Plantations and Palm Oil Mills, recorded a 32% year over year drop in revenue to US$341.0 million. There was also a 41% decline in EBITDA (earnings before interest, taxes, depreciation, and amortisation) to US$101 million.

Declines across the board in the segment’s operational metrics had a large role to play in its weak showing (though lower crude palm oil prices – something out of the company’s control – was also a big culprit). Here’re some of those metrics and their performances during the quarter:

  1. Fresh fruit bunches (FFB) production dropped 6% to 2.11 million tonnes compared to year ago.
  2. FFB Yield (given in tonnnes per hectare) slipped from 5.1 in the same quarter in the previous year to 4.6, representing a 10% decline.
  3. Palm product output dropped by 8% year over year to 634,000 tonnes. The volume of output can be further divided into CPO (Crude Palm Oil; a 9% fall to 511,000 tonnes) and PK (Palm Kernel; a 5% drop to 123,000 tonnes).
  4. Palm product yield (measured in tonnes per hectare) came in at 1.29, down 10% from a year ago.

There’s a bright spot in the Plantations and Palm Oil Mills segment, and that is the increase in its plantation area; Golden Agri ended 31 March 2015 with a total planted area of 484,937 hectares (as mentioned earlier), representing a 3.3% increase in total planted area from a year ago.

Moving on to the Palm and Lauric segment, there was a 14% fall in revenue to US$1.4 billion despite a 3% increase in sales volume to 2.033 million tonnes. The segment also ended the quarter with an EBITDA of US$22 million, a 27% drop when pitted against the same period a year ago.

Lastly, for the Oilseeds segment, a 20% drop in sales volume to 250,000 tonnes had resulted in a 36% reduction in revenue to US$134 million. There was a tiny bright spot though, as the segment’s EBITDA had turned from –US$3 million a year ago to US$2 million in the reporting quarter.

Future outlook

Despite a painful 2014 (in which profit fell by nearly two-thirds) and the poor showing in the first-quarter of 2015 which I’ve just went through, Golden Agri’s management remains optimistic about the long-term future of the palm oil industry and their business.

To that point, here’s what Franky Widjaja, Golden Agri’s Chairman and Chief Executive Officer, said in the earnings release:

“Longterm fundamentals of the industry remain promising, notwithstanding periods of volatility. While there may be resistance from the current large soybean production and low crude oil prices, slower CPO output growth and the biodiesel policy in Indonesia bode well for future CPO prices. Moreover, we view that global demand of palm oil both for food and non-food continues to be strong, especially in developing countries.

We stay focused on our sustainability initiatives, yield improvement and cost efficiency in our plantation business. The integration of our palm downstream business is progressing well and this reflected in the performance. After a phase of rapid expansion, we are shifting our focus towards value chain optimization that will enhance the contribution to our bottom line.”

Foolish Summary

Lower crude palm oil prices have weighed down heavily on the results of many crude palm oil companies and there is really nothing much they can do except to wait for the market to turnaround – Golden Agri is no exception.

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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 Stanley Lim does not own any companies mentioned above.