Blue chip with PE of a penny - Golden Agri

Golden Agri -- weak today (53 cents) on v high volume of 76 million shares traded at lunchtime now.

CPO is weakening further to near three-year low as the Malaysian Ringgit strengthened.

Just to share 2 articles on the status of palm oil.

www.bernama.com.my/bernama/v7/bu/newsbusiness.php?id=948840

www.businessinsider.com/palm-oil-2013-5

One expect palm oil prices to recover and the other expect it to fall further before recovering in the second half of the year.

My thought on this is, given the lack of land for expansion in indonesia and malaysia and the call for sustainability in oil palm production, and the relative constant growth in demand for palm oil, there is little risk of CPO going signifcantly down (already 40% down and showing some signs of bottoming), but no one knows when it will head north either.

I will post another update when I have the Q1 results. I am expecting a profitable but slower quarter than previous quarters.

(warning: vested and biased, long-winded post)

Golden agri press release did a good summary.

info.sgx.com/webcoranncatth.nsf/VwAttach...ease.pdf?openelement

More positives than negatives in my opinion (vested and biased)

Negatives:
1) Net Profits falls 30% from Q1 2012 (to be expected from the fall in CPO)
2) Indonesia palm oil business GP margin is 30%, further sequeezed from 34% and a far drop from 39% of good years. (the lower ASP is again caused by lower CPO price)
3) China operation highly voliatile (swinging from loss to profits and profits to loss,unpredictable)

Positives:
1) Inventories has falling in the consecutive 4 quarters from a high of 890 million
2) QoQ improvement in NP,as well as the turning of profits from China operations.

When compared with Bumitama Agri,
Both experince a fall in NP from a year ago, although golden agri suffered a higher fall.
BUT, if you compared qoq, a totally different pic emerged, golden agri peformance is getting better while bumitama is getting worse.

P/B Bumitama is trading at 2.5 at P/B whereas Golden agri is trading at 0.65 P/B. Granted Bumitama is expected to grow its plantation at 10% for the next 4 years, but golden agri aim to increase plantation by 10% too in2013 thro aquisition, and they still have the liberia story.

If we annualized PE,golden agri is about 12 while Bumitama is 25.

In terms of ability to generate FCF,they are about on par.

As such, I felt golden agri is undervalued and bumitama is over-valued.

CPO price is almost the destroyer, but there doesn't seem anything wrong fundementally with the business, just need to be patience for CPO to recover.. the question is just when,not if. CPO price has bottomed, if no new low is formed over the next few months.

There are many other qualitative plus points about golden agri business, like its has a downstream presence etc.

Not sure how the market will react thou, but with such a report card, I will accumulate on further weakness.

Risk: valuation of biological assets is done annually, not quarterly, so we might get a rude shock, but I am most concerned about the core earnings than non cash items, given golden agri has such low gearing ratio - 0.14,and high interest cover of about 10, there will be no tangaible effect.

Will post another comparison when first resources results is out.

P.S (forgive my longwindness)

Looking at the few plantation plays listed in SGX, first resources is the only plantation play that beat golden agri in its report, with higher margin and improvement qoq and yoy results.

If we annualised earning, it is trading at around 10x P.E

Investors looking into exposure into agri- CPO plays may look at first resources too.

However, golden agri and first resources are different, for golden agri, you are buying into a recovery story, first resources is more of a growth story. Hence the difference in the two in terms of PE and P/B, for first resouces, you are paying a prenium in terms of PB.

IN terms of av. FCF per shares over the past 6 years(where the cpo price go thro a high and then a low), first resources is the one that consistency show positive FCF with av of 1.5 cents whereas golden agri avFCF per shares is 0.2 cents. av.FCF per shares over price for first resources and golden agri will be 120 and 190 respectively. Perhaps that is the reason why first resources is doing better in the terms of price performance.

Golden Agri went up today despite the overall market correction. I took notice and learnt soemthing from UOB KH report. After this, I am going to start with a small position in palm oil stocks in anticipation of CPO price recovery.

The UOB KH report said: "Maintain UNDERWEIGHT but see value emerging in efficient players.
Positive on the sharp fall in inventory level to below 2 m tonnes and expect the inventory to stay at 1.7m-1.8m tonnes – a boon to CPO price.

"Accumulate efficient and growth companies. As plantation shre price corrected post 1Q13 results, we are seeing good value in the young efficient upstream players, ie First Resources (Buy/Target: S$2.35) and Bumitama Agri (Buy/Target: S$1.12). We also like Wilmar (Buy/Target: S$3.80) for its earnings recovery on a less volatile market and IOI Corp (Buy/Target: RM6.25) on the upside from the proposed demerger of its property unit."

I beg to differ with the analyst view below:

Malaysian Palm Oil Board (MPOB) reported May-13 inventory data of 1.8m MT, 5.1% lower MoM and moderately flat at +1.7% YoY, as expected.


Lower inventory data will support plantation co. share prices in the immediate term, we believe.

However, negative trends such as increasing supply of competing edible oils, rebound of CPO inventory levels as palm trees enter peak production period on the back of supportive weather conditions, high CPO stock inventory at ports in China and India and range-bound crude oil prices are likely to depress CPO prices over the next 6-12 months, we believe.


We maintain our bearish view on the sector due to sustained earnings weakness ahead.

GGR (Golden Agri Resources) and FGV (Felda Global Ventures) remain our top Sells for their greater earnings sensitivity to CPO price changes and lofty valuations.

I agree that CPO price might be still trending down after the ramandan period, that's why I have set aside funds to accumulate if price of CPO and golden agri weaken further.

But the reasons for the fall such as increasing supply of competing oil?

That has to be soy oil, and the price gap of soy to CPO is amost 40% at almost historical high, how can soy oil expect to take over CPO then?

Palm oil being the cheapest alternative can be use as biofuel, and the shipping industry is thinking of using biofuel/ and LNG to adhere to 2020 environmental sulphur emission from fuel. while the demand is too far to guage, the fact about growing population and the lack of development of planations (due to green groups demand on sustainability) should ensure that in the long run, demand for CPO will outgrow CPO supply. Already Malaysia and Indonesia and restricting on new lands being cleared for planation although lands already earmarked for plantations will not be affected.

Lofty valuations?? What metric is the analyst using? For a planation play where plantation can yield CPO up to 18 years, I believe NAV is a reasonable metric, PE might be use too. In terms of PE, golden agri might be unattractive, but it is already trading at about 30% discount to NAV, and if the verdant fund in Liberia is to bear fruits, there will have more supply too.

your choice in reading and beliving