There are a bunch of similarities between Wilmar International Limited (SGX: F34) and Golden Agri-Resources Ltd (SGX: E5H). Both companies are blue chips in Singapore’s stock market given that they are part of the 30 constituents of the local market benchmark, the Straits Times Index (SGX: ^STI). Both are also agriculture-based businesses that mainly produce palm oil and consumer products based on it. Both happen to be stocks that have performed badly over the past few years as well. To the last point, shares of Wilmar and Golden Agri-Resources have fallen by 34% and 33%, respectively, since 18 March 2011….
There are a bunch of similarities between Wilmar International Limited (SGX: F34) and Golden Agri-Resources Ltd (SGX: E5H).
Both companies are blue chips in Singapore’s stock market given that they are part of the 30 constituents of the local market benchmark, the Straits Times Index (SGX: ^STI). Both are also agriculture-based businesses that mainly produce palm oil and consumer products based on it. Both happen to be stocks that have performed badly over the past few years as well.
To the last point, shares of Wilmar and Golden Agri-Resources have fallen by 34% and 33%, respectively, since 18 March 2011. This has happened even as the Straits Times Index has remained flat. With the big share price declines for the two agriculture companies over the past five years, it might prompt the individual investor to ask: Would Wilmar or Golden Agri-Resources be the stronger investment right now?
There are many other important things for investors to look at in order to arrive at an answer to the question, but in here let’s focus on three key aspects of the two companies’ business fundamentals: Their financial strength, track record of growth, and valuation.
What I’m interested in is the shape of Wilmar’s and Golden Agri-Resources’ balance sheet.
A weak balance sheet – one that’s bloated with debt – can be a risky thing for shareholders. When a company has trouble servicing or repaying its loans, its shareholders may have to face painful situations such as dilution, involuntary asset sales by the firm, the elimination of dividends, and in the worst-case scenario, bankruptcy.
Golden Agri-Resources ended 2015 with US$3.05 billion in total borrowings, US$503 million in cash and short-term investments, and US$8.75 billion in total equity on its balance sheet. These numbers give the company a net-debt to equity ratio of 29%. Meanwhile, Wilmar ended the same year with a net-debt to equity ratio of 83% given its US$17.4 billion, US$4.01 billion, and US$16.1 billion in total borrowings, cash and short-term investments, and total equity, respectively.
Turns out, Golden Agri-Resources has the better financial strength here with its lower net-debt to equity ratio. But, it’s really a case of picking your own poison as both companies do have substantial amounts of debt that heavily outweighs their level of cash.
Track record of growth
A company’s business growth is an important area to study for investors because it is what builds up the firm’s real economic worth over time. This is where a company’s historical growth rates come into play – while it’s certainly far from being a perfect indicator for the future, history does give us some guidelines on what we can expect in the years ahead.
The metrics I want to focus on are the revenues, profits, and operating cash flows for Wilmar and Golden Agri-Resources.
Starting with Wilmar, data from S&P Global Market Intelligence show that the company had delivered US$30.4 billion in revenue, US$1.32 billion in profit, and a negative US$2.32 billion in operating cash flow in 2010. These figures had mostly grown over the years, seeing as how revenue was at US$38.8 billion in 2015 (up 28% in total from 2010), profit was at US$1.06 billion (a 20% decline), and there was positive operating cash flow of US$2.23 billion.
In Golden Agri-Resources’ case, these are how its growth figures look like:
- Revenue: US$3.50 billion in 2010, nearly doubling to US$6.51 billion in 2015
- Profit: US$1.42 billion in 2010, shrinking to a loss of US$16.7 million in 2015
- Operating cash flow: A jump from US$167 million in 2010 to US$569 million in 2015.
Despite Golden Agri-Resources’ impressive revenue and operating cash flow growth from 2010 to 2015, the company’s bottom-line had suffered badly. Meanwhile, Wilmar had generated steady – though clearly less impressive – revenue growth over the past five years, remained solidly profitable, and greatly improved its cash flow generation. These traits give Wilmar the better growth track record.
Even the best businesses can become a lousy investment if they are bought at exorbitant prices. That’s why it’s crucial that investors keep an eye on a company’s valuations.
For our purposes, there’s no need for a precise read on the valuations for Wilmar and Golden Agri-Resources. The simple price-to-sales (PS) and price-to-book (PB) ratios will suffice. Here’s how the ratios for the two agriculture stocks look like:
- Wilmar: Current share price of S$3.31, PS ratio of 0.38, PB ratio of 0.98
- Golden Agri-Resources: Current share price of S$0.43, PS ratio of 0.59, PB ratio of 0.45
It appears to be a tie here given that Golden Agri-Resources has the higher PS ratio but lower PB ratio.
A Fool’s take
Rounding up, both companies have their own strengths and weaknesses when they’re pitted against each other. In the valuation arena, Wilmar and Golden Agri-Resources are equals. But, Wilmar holds the upper-hand in terms of growth while Golden Agri-Resources has the stronger balance sheet.
As a reminder, while what we’ve seen above is useful and important, they shouldn’t be taken as the final word on the investing merits of both Wilmar and Golden Agri-Resources. There are other important areas of the two companies’ businesses for investors to look at before any investing decision can be reached.
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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 Chong Ser Jing doesn't own shares in any companies mentioned.