Hazy outlook…

The recent haze reminded me of one of my stock –  Golden Agri (read here).

Incidentally, the NEA served legal papers on Singapore-listed firm, Asia Pulp and Paper (APP) which has an office in Singapore, to supply information on its subsidiaries in Singapore and Indonesia, as well as measures taken by its suppliers in Indonesia to put out fires in their concessions. APP is the largest paper and pulp company in Indonesia and, like Golden Agri, is a subsidiary of the Sinar Mas conglomerate. (Read here and here)

Among all my stock holdings, the worst performing one is Golden Agri. It is one of my earliest stock (read here), and I have been holding the stock since Dec 2010 (read here).

I have watched its share prices sink since 2010, and it is definitely not a stock for the weak hearted. Share prices aside, I have watched the fundamentals of the company deteriorate, while the debt level ballooned. In addition, earnings per share is negligible. Partly attributed to the slump in CPO- read here.  Palm oil prices have now hit six-year lows.

To add to the carnage:

• Moody’s just recently downgraded Golden Agri (read here) on 4 Sept 2015,
• In May 2015 the Roundtable for Sustainable Palm Oil (RSPO) has asked Golden Agri-Resources to stop acquiring or developing new land until it is satisfied the company has resolved issues relating to land acquisition and development with local communities. (read here)

Of course not forgetting, markets world wide are in a slump, and the Singapore market has entered bear territory and might get worse.

My first thought was the post by the blogger in Musing on Markets (read here and here) – Go where it is darkest.

Then my thought flashed to the quote by Charlie Munger:  “All I want to know is where I’m going to die so I’ll never go there.”

I think for Golden Agri, things are quite “‘dark” now (but then again, I have been thinking like that for the past 4-5 years hahaha)- it is in an industry that is not doing well, and among its peers, the company has relatively matured plantations age profile (average tree age: 15 years), low profitability downstream, and lagging ROEs (vs peers) – read here. To make matter worse, it is not able to acquire or develop new land. Think it is as close to a perfect storm.

With a price to book of 0.32 (most recent filing) and a P/E Ratio of 24.58, so is this stock cheap or expensive (read here)? As per the article, arguably the most useful ratio to use is the price to book ratio, esp. for cyclical stocks. In fact to Peter Lynch, a high PE signals that it is a good time to buy cyclical stocks (read here), and buying at a low price to book ratio is a better strategy (read here).

Nevertheless, the ballooning debt of Golden Agri is a major concern. Current total debt is SGD 2.99B, with a total cash of only SGD 496.85M. Total Debt/Equity ratio is 33.84. Frankly,this is what bugs me the most. I can understand if earnings are poor, and stock prices are dropping but the growing debt in an environment of rising interest rate is a concern.

 “Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job.

Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed Even a short absence of credit can bring a company to its knees. In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.” Warren Buffett

The tiny glimmer of light so far from what I can see is the possibly of a raise in Crude Palm Oil prices due to El Nino weather event and higher use of palm-based bio-diesel by Indonesia. (read here and here)