We hosted Golden Agri-Resources for meetings with a prominent client recently.
Golden Agri is the largest Indonesian palm oil producer, and has emerged as a popular proxy for the food inflation theme. The stock is up 16% ytd and the average daily volume has doubled since January.
Our assessment of the key questions raised are as follows:
What is Golden Agri's palm oil productivity profile?
Golden Agri is in a good position to increase palm production levels. This would enable it to take maximum opportunity of record high palm oil prices.
Golden Agri has a high proportion of old trees. 49% of its planted hectarage consists of mature trees, which tend to have lower crop yields. Crop yield is the average tonnage of crude palm oil extracted from a hectare of land, and at 4.8 tonnes per hectare, Golden Agri's crop yield is on the low side for large Indonesian plantation companies.
The other major palm oil producers in Indonesia have a lower proportion of old trees. Wilmar, First Resources and Bumitama Agri are in the 20-30% range.
In mitigation, management stressed it is replanting intensively. In the next three years, the replanting should bear fruit (literally and metaphorically), meaning that crop yield could rise to over 5 tonnes per hectare by FY25.
What are Golden Agri’s refining productivity prospects?
Golden Agri has a significant downstream business. Although it is not as large as Wilmar’s, at least a third of Golden Agri's operating earnings are generated by the downstream business, which principally comprises the refining of palm oil in Indonesia and China.
The bull market in palm oil prices is positive for the downstream business. It could improve in FY22-23, as Golden Agri has expanded its biodiesel capacity at precisely the correct moment. Indonesia will consume more palm-based biodiesel, as crude oil prices are now near US$120 a barrel, leading companies and consumers to seek alternatives.
What are Golden Agri’s dividend prospects?
According to the company guidance, Golden Agri is expecting a payout rate of 38%. This represents a dividend yield of 4%, which is excellent in the industry. Golden Agri is effectively a growth stock in a palm oil bull market, while also paying high dividends.
What is Golden Agri’s balance sheet situation?
At the current spot price of US$1,600/tonne, Golden Agri’s palm oil business is enjoying a 70% gross margin. According to consensus, Golden Agri is set to generate 10% gross margin in FY22. Part of the discrepancy in those numbers is because Golden Agri’s gross margins in downstream are much lower.
The strong gross margin means that Golden Agri is effectively a deleveraging play. Even with the heavy planting expenses of US$100mn per annum, Golden Agri is rapidly reducing its net debt. Golden Agri's net leverage has dropped to 48%, from 65% in 2014. And it could decline further to 40% in the next few years, if the high prices are sustained.
Golden Agri is trading at a discount to palm oil peers.