Golden Agri as a stock or company presents a very interesting study. I was prompted by a post I saw on Golden Agri by another blogger. (read here) I have also chanced upon an analyst report and feel that the investment thesis done in June 2014 remains relevant. (read here)
It is at the mercy of Palm Oil price fluctuation despite increasing productivity. In addition, the Indonesian government will likely follow and adjust its crude palm oil (CPO) export tax policy which may adversely affect sales of Palm Oil from the country. Macro economics aside, let’s study the fundamentals of the company internally. Currently profit has fallen and debt rates are increasing, the trend has not been moving in a positive trend. However, free cash flow is improving. Hope that will slowly translate to improvement in profit margins and lower debt rates. Internally, the management appears to be taking opportunity of the ‘low’ stock price to buy back shares. The price to book ratio has been decreasing which again seems to point to better value for this cyclical stock. Another positive sign is the improving Days Sales of Inventory and Inventory Turnover ratio which indicate better turnover rate of their inventory.
An article from Fools mention that “Macro-economic data is not a reliable indicator of future stock price movements….. This low valuation is what creates an investing opportunity. That’s because any positive improvement – even slight ones – in the performance of the company or its industry would be a pleasant surprise for the market and thus cause the market’s expectations to move upward.” (read here).
The fluctuation of Golden Agri stock prices can be quite extreme jumping from 0.4 on 23 March 2015 to 0.435 on 30 March 2015, representing a 8.75% increase in less than a week. Not surprising since this is still a highly liquid / traded penny stock.
1) Share buy back
68,222,400 shares bought at SGD 0.4157 on 27/03/2015. Total Consideration: SGD 28,432,880.29 (read here)
2) Free Cash Flow
Data from Yahoo Finance (see below):
Interestingly, the data from ft.com (see below) differs in terms of Capital Expenditure. Can’t really say it is due to the different currency specified (SGD vs USD) since Total Cash flow from Operations are the same.
Nevertheless, after subtracting the Total Cash flow from Operations by Capital Expenditure, we get the Free Cash Flow (FCF). From 2011 to 2013, the FCF has worsen on a yearly basis, and only in 2014 starts to improve. Still the FCF is negative. It is still too early to say that FCF is improving, since the trend only reversed for 1 year. Chart done base on Yahoo Finance data (see below):
3) Sales has been increasing, but profit and income has been decreasing. There should be slight increase in profit and income moving forward.
4) Leverage and debt has been increasing, despite sales improving. All hopes pointing to improving debt rates moving forward into 2015.
5) Price to Book ratio and P/E ratio
Price to book ratio has been decreasing while P/E has been rising.
6) Crude palm oil (CPO) export tax policy
Malaysia, second-ranked palm oil producing and exporting country, will import a duty of 4.5 per cent on shipments of the vegetable oil. (read here) It is likely that the Indonesian government will likely follow and adjust its crude palm oil (CPO) export tax policy. (read here) This tax policy (if implemented) again will adversely affect Indonesian Palm Oil companies such as Golden Agri.
It was only recently that Palm Oil price rallied after Indonesia and Malaysia scrapped export taxes, boosting sales abroad. (read here)
7) Inventories level. According to Peter Lynch a study on the inventories is critical for Cyclical stocks.
Inventories: Are inventories piling up? This is a particularly important figure for cyclicals. Lynch notes that, for manufacturers or retailers, an inventory buildup is a bad sign, and a red flag is waving when inventories grow faster than sales. On the other hand, if a company is depressed, the first evidence of a turnaround is when inventories start to be depleted.
The Days Sales of Inventory (DSI) seems to be going lower, which is a good sign. While the Inventory Turnover appears to be increasing which is also a good sign, as a low inventory turnover ratios indicates a company is carrying too much inventory, which could suggest poor inventory management or low sales.
Finally, I hope things will continue to improve for Golden Agri. I have missed the opportunity to buy at the lower price of below 0.4. Maybe it will come again and drop even lower. One can never predict the stock price fluctuations. In the meantime back to reading news on Palm Oil and Golden Agri.