As mentioned in my recent post, one of the earliest stock I bought is Golden Agri. It is also the stock which occupies the majority of my portfolio.
The company doesn’t really have a very strong fundamental. There have been numerous write-ups on it (http://www.fool.sg/?s=golden+agri&submit=).
If one is to view it from a very simple technical perspective:
Price to book value, which is at 0.65, it would definitely seem undervalued.
It has a P/E ratio of around 17 (Dec 2014). Earnings yield is 5.8%.
The net debt (total debt minus total cash) to equity ratio increasing only slightly from 0.23 to 0.26 in Aug 2014.
Golden Agri-Resources’ debt to equity ratio comes up to 30% (not excessively high).
In terms of sales volume, the company had seen healthy expansion in its palm-oil related business even as its oilseeds operations shrank.
Efficiency is one of the hallmarks of GAR. Its Asset Turnover 0.5 implies the company generates around S$0.50 for every dollar of asset employed in the business.
However, its operating cash flows are erratic,and profits are highly dependent on the price of palm oil. In a way most companies are directly or indirectly affected by prices of commodities. Some more than others – Golden Agri is one of them. Its stock price being highly correlated to CPO price.
In addition, there was a concern earlier on the bill which was passed in Indonesia restricting foreigner ownership on palm oil campanies.(http://www.thejakartapost.com/news/2014/10/03/businesses-breathe-sigh-relief-new-law.html)
An interview transcript of Jim Rogers in Dec 2014, seems to point out that palm oil have long term problems. (http://www.wallstreetdaily.com/2014/12/08/jim-rogers-commodities-interview/)
Other concerns will be the age of the palm trees in Golden Agri.
To quote: “One main area of concern for investors to watch is the age profile of Golden Agri’s palm trees. Compared to the beginning of 2014, trees which are older than the prime age of production had moved up from 27% of total planted area to 34%. Palm trees enter their prime production age between the ages of 7 and 18. As Golden Agri removes the older trees and replants young ones in their place, the company might experience a few years of lower profits as the trees will take up to seven years to mature into the prime age profile.”
Perhaps, this is why I am more wary of buying cyclical stocks whose share prices are linked strongly to the price of commodity eg. recent oil related stocks sell off. As the saying goes, the market can remain irrational longer than you can stay solvent. So how long will CPO price remain depress (even with the recent small price increase due to flooding in Malaysia) or how long will oil prices stay low is anyone’s guess. Are you prepared to wait 1 yr, 5 yrs or 10 yrs? Is the super-cycle for commodities over? I don’t know. There are too many macro factors. I am still holding on to the Golden Agri stock I bought in Dec 2010 (in fact I have bought and sold some of Golden Agri shares prior to Dec 2010). Still waiting for the uptrend. So the question is: have we entered a phase of descending commodity prices in general? (http://blogs.worldbank.org/growth/moving-past-commodity-supercycle-are-we-there-yet)
Whatever it is, if the fundamental of the company is intact. Not a great company, but not a lousy one too. Easy to enter on price dips (as compared to shares with less volatile price swings like Vicom and Riverstone).
Just too dependent on palm oil price and the fate of the Indonesian regulation (PPs).
Would I want to enter into a oil related stock now? Not sure – but guessing the price of crude oil is akin to guessing the direction of CPO (crude palm oil) price. There are just too many macro economic factors that cannot be influenced by the fundamentals of a company alone. I won’t know when Saudi Arabia will change their stand.
Am trying to find my cycle resistant stocks with a moat. Hence my recent purchase of ISOTeam.