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Golden Agri Corporation: Company Analysis

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Golden Agri Corporation: Company Analysis
Table of Contents
  1. Introduction
  2. Background
  3. Company Strengths and Weaknesses
  4. Financial Statement Analysis
  5. Summary, Conclusions, and Recommendations
  6. References

Introduction

Golden Agri Corporation is a growing company in the far east of Asia that has established itself as a strong presence in Singapore and in China to some extent. The performance of the company has been seen to be competitive in the region which has allowed it to sustain itself. Golden Agri became listed on the stock exchange of Singapore in the year 1999 which effectively resulted in the formulation of the biggest palm oil company under private ownership of the entire world. The backbone of the company is formed by land ownership in excess of 400,000 hectares in Indonesia which has palm trees based on which nearly 34 palm oil processing mills are able to rely for their operations augmented by refineries and kernel crushing plants.

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Background

The beginnings of the Golden Agri Corporation can be traced back to Mauritius however where it initiated its operations and became listed on the local stock exchange in the year 1996. Once it was able to expand its operations and presence in East Asia, it incorporated itself on the Singapore stock exchange which was followed by growth through takeovers of PT Purimas Sasmita and Massingham International. These resulted in massive expansion of the plantation area of the company which climbed to in excess 150,000 hectares. Crude palm oil production which formed the primary concern of the company went up to 610,000 tons which was gradually increased to a level of 1,000,000 in the year 2002. Golden Agri maintained its quality status in this time which was evidenced by its achievement of the ISO 9001 quality standard for superior management of the mills under its operations. This was complemented by an ISO certification for environmental contributions in the following year (Background 2010).

In 2005, Golden Agri entered the Chinese market by taking over the China Agribusiness for which the company made active use of the deep sea port and refineries in Zhuhai and Ningbo. The commitment to quality for the company was able to win it a strong and loyal customer base which saw it chosen as one of the super brands in Indonesia and also win the customer loyalty award in the same region. At the same time, Golden Agri was able to expand its crude palm oil production to 1.6 million tons (Golden Agri Resources Annual Report 2007).

Company Strengths and Weaknesses

Golden Agri Corporation is able to provide value to its shareholders and expand in Asia because of a diverse range of operational strengths at its core. The company enjoys a high degree of vertical integration which allows it to service the whole breadth of the market from basic raw materials to the value added finished products allowing it to tap margins as well as exploit gaps while also gaining specialization in the product ranges associated with its sphere of operations. These are able to be maintained via exploitation of economies of scale which have cost benefits for the company as its presence extends from Mauritius to Indonesia, China and Singapore allowing it to be competitive in the market for crude pal oil and other products drawn from it. One of the core competencies of the company is its strong reliance on information technology, particularly in the realm of plantations, and strong management which is evidenced by the ISO standards related to management that it was able to attain lately. These allow not only the most output to be extracted from the resources that the company chooses to invest but also result in a sustained level of quality. Research and development has also been a crucial part of the success of the company and through its SMART Research Institute, it is able to tap the potential of advanced seed varieties and techniques that increase productivity and output for Golden Agri Corporation.

Financial Statement Analysis

The financial statements of the company bear testament to these and other strengths of the company. These statements are basically an output of the accounting processes of the company based on an international framework of accounting standards such as the IFRS (Watson 2006). The information and the numbers impound the performance of the company for a whole financial year in terms of revenues, costs, expenditures, expansion plans and cash flows as well as the position of the company as its stands today in terms of its assets, liabilities and equity. This is basically a scorecard for the performance of the company which shareholders and other relevant stakeholders are able to utilize to assess the fundamentals of the company and its future prospects. Other items extracted from these financial statements include financial ratios related to operations, profitability, liquidity and the debt position of the company which when compared to industry or competitors’ equivalent figures can allow a meaningful comparison of relative performance to be made.

Ratio analysis of the company is done below to allow a measurement of the financial strengths and weaknesses of the company to be made.

Golden Agri Corp Ratio Analysis
2006 2007 2008
Profitability Ratios
GP Margin 23.90% 35.10% 29.30%
Net Profit Margin* 41.70% 62.20% 46.30%
ROA 15.80% 23.20% 20.30%
ROE 27.60% 35.30% 30.00%
Liquidity Ratios
Current Ratio 1.22 1.48 1.29
Financial Leverage
Debt to Equity 0.28 0.15 0.1
Asset Turnover
Receivables Turnover 23 15 17
Inventory Turnover 61 94 43
*Net Profit Attributable to Equity Holders.

As the figures show, gross profit margin for the company has been increasing from 23.9% to 35.1% in 2007 which has been followed by a decline to 29.3% in 2008. This rise can be attributed to the relative decline in cost of goods sold level in 2006 when it stood at $860 million, going up to a level of over $1 billion in 2008 against a rise in revenues to the $3 billion mark in the same year. This highlights the better use of resources of the company and the rapid expansion that it has been undergoing allowing it to tap economies of scales and getting better gross profit margins. The corresponding increase in Net Profit margin serves to substantiate the superior management credentials of the company as its has not only been able to show efficient operations but has also reduced fixed costs and other expenditures related indirectly to the business leading to about a 20% rise in NP margin in 2007 which came down in 2008 though on the back of the financial crisis and the volatility in demand that came about as a result of it. The 2008 income statement illustrates these troubles in the form of rising finance costs that went up from about $35 million to $41 million and the more substantial foreign currency loss that accompanied that weak dollar and volatility in the market that stood at $34 million, up from $3 million during the year, accounting for the major portion of the drop in Net profit margin for the year for Golden Agri. This exposure to foreign currency and a lack of hedging appears to be one of the weaknesses of the company which should be resolved via better laying out of financial policy and hedging practices that reduce exposures to a single unit of measurement (Golden Agri-Resources Limited ICON Press Release 2010).

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ROA and ROE for the company follow a similar trend, rising in 2007 and falling back a bit in 2008. The net income figures illustrate this via rise from $540 million in 2006 to $1.2 billion in 2007 and relatively smaller rise to $1.4 billion in 2008 while no major disposal of assets or equity issues took place. This is a reflection of the strength of the company in being able to handle size expansions but also a weakness in terms of volatilities in the market that expose the company to cycles of varying profitability and performance.

Current ratio for the company improved from 1.22 to 1.48 in 2007 but fell back again in the following year. The first change can be explained through a massive inflection of Golden Agri’s inventories to $311 million from $144 million as well as an equivalent rise in trade receivables going up from $45 million to $120 million which allowed for increase in current assets leading to a rise in current ratio and an equivalent rise in the ability of the company to meet its short term obligations (Vandyck 2006). However one weakness that has to be identified here is that the rise in current ratio can primarily be attributed to a rise in inventory levels which is not a very liquid asset. In fact if it could have been sold, it would already have been reflected in cost of goods sold rather than kept as significant inventory on the balance sheet of the company. This brings into question the implied improvement in liquidity of the company during the year. This weakness manifested itself in the year 2008 as the inventory levels of the company fell to some extent while short term loans piles up to about $309 million from $262 million, highlighting the fact that Golden Agri was not able to furnish its short term obligations through inventory, requiring issuance of short term loans in an environment where costs of borrowing are already higher due to the financial crisis (GOLDEN AGRI-RESOURCE (GARPF.PK)).

Financial leverage of the company has been improving via a decline in debt to equity ratio as the company has reduced its debt levels from $1 billion against assets of nearly $3 billion in 2006 to $2 billion against assets of $6.8 billion in 2008 (Suhartono 2009). This is a good shift in the capital ratio of Golden Agri as it now has more assets to back its long term payments, making it less susceptible to potential volatility in debt payments and adverse scenarios. However, one weakness here is that the company is not able to take advantage of tax shields offered by debt payments and instead has to furnish higher levels of return on equity to shareholders (Watson 2006).

The turnover ratios hint at improved management despite difficult conditions for the company. Receivables ratios have come down from 23 in 2006 to 17 in 2008 which is a reflection of better policies of getting back payments from clients, allowing liquidity to improve and less resorting to bank loans and overdraft facilities. However, it may also reflect a tightening of credit policy which has an impact on the revenues as customers may not always be able to pay as quickly, particularly in hard financial times. Inventory turnover has improved from 61 to 43 after an initial jump to 93 which may be because of the takeovers that Golden Agri has been pursuing, where inventory levels have been traditionally high. In 2008 however, these have been brought down on account of better management and performance which forms a crucial strength of the company.

Summary, Conclusions, and Recommendations

As the history and the performance of the company shows, it has a strong growth orientation and a commitment to superior management as well as innovative ways of technological improvement which provide Golden Agri an edge over its competitors. Its expansion in size and well managed facilities backed by ISO standards have allowed the company to tap cost advantages in the competitive crude palm oil market and has established a significant presence in Asia. These strengths of the company are translated in its financial statements. It is able to show increasing profitability despite the regular takeovers and transition period for the company, evidenced by rising gross profit and net profit margins. ROA and ROE also seem to be rising along with the current ratio which is evidence of little financial problems in the short run for the company, however the inventory levels are a cause for concern for the company and given the sometimes perishable nature of the goods that Golden Agri manufactures, this needs to be brought into control. Debt level is low which is good for the investor as it hints to strong asset backing for the shareholders as well as for debt payments but the company could still explore possible increases in debt to tap tax shield advantages. These strong fundamentals of the company, sound expansion policies, commitment to quality and good solvency and performance figures make investment in Golden Agri a worthwhile proposition with potential for high returns through capital appreciation in the long run for an investor.

References

Background [online]. GAR Agribusiness and Food. Web.

Golden Agri Resources Annual Report 2006 [online]. GAR Agribusiness and Food. Web.

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Golden Agri Resources Annual Report 2007 [online]. GAR Agribusiness and Food. Web.

Golden Agri Resources Annual Report 2008 [online]. GAR Agribusiness and Food. Web.

Golden Agri-Resources Ltd [online]. Google Finance. Web.

Golden Agri-Resources Limited ICON Press Release [online]. ICON Group International. Web.

GOLDEN AGRI-RESOURCE (GARPF.PK) [online]. Yahoo Finance. Web.

Suhartono, H. (2009) Singapore’s Golden Agri eyes $215 mln from rights issue [online]. Reuters. Web.

Vandyck, C. (2006) Financial Ratio Analysis. London: Trafford Publishing.

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Watson, D. (2006) Corporate finance: principles & practice. 4th ed. London: FT/Pearson Education.

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