Golden Agri expands product chain to ride through volatile CPO prices

Amid the volatile prices, Indonesia-based planter  Golden Agri-Resources  (GAR) plans to stay resilient by eking out additional margin through its downstream business. Richard Fung, GAR&rsquo s director of investor relations, believes the company can differentiate itself by moving up the value chain with a broad product portfolio of higher value-added food and non-food products.

&ldquo Examples include margarine and shortenings speciality fats, palm kernel oil-based products and biodiesel and oleochemicals used in cosmetics and detergents. This provides the company with flexible offtake channels to sell our products where we can get healthy margins,&rdquo says Fung in an interview with  The Edge Singapore.

Other value-added areas relate to sustainability certification, traceability to the plantation, customised specifications and specially formulated products, and healthier alternatives. This includes trans-fat-free products and low in contaminants such as 3-monochloropropanediol and glycidyl fatty acid esters. GAR can produce these products through its oils and fats research laboratory, where its food technologies help to develop new palm-based products, he adds.

&ldquo We also continuously upgrade our downstream production facilities to produce such new products. We expect our downstream business to produce higher margins, supported by our vertically integrated business model and ability to produce a large portfolio of higher-value-added products,&rdquo says Fung.

 

GAR&rsquo s improved margins from its downstream business is one of the main contributors to its palm, lauric and others segment, which reported revenue of US$5.5 billion ($7.7 billion) for 1HFY2022 ended June, up 23% y-o-y. Earnings in the same period were up by 154% y-o-y to US$390 million, thanks to a higher margin of 5.4% from 3.6% last year. GAR has declared an interim dividend of 0.8 cents versus 0.528 cents for the previous year&rsquo s period.

Valuations look more interesting

GAR was incorporated in 1996 as a subsidiary of Asia Food & Properties. In 1999, GAR &mdash part of the sprawling business empire controlled by the Widjajas &mdash was listed on the  Singapore Exchange  (SGX) with an oil palm mature area of approximately 155,500 hectares and CPO production of 610,000 tonnes.

Today, GAR has operations across 13 countries, and its products are delivered to around 100 countries worldwide, producing more than 2.35 million tonnes of CPO in 2021. It manages about 536,000 hectares of plantations, including smallholder farms across Indonesia. The firm also diversified into the sugar trading business in 2019, following an agreement to absorb the sugar trading division of RCMA Group.

Now, despite reporting much-improved earnings for 1HFY2022, the results did not exactly excite the market. Year to date, GAR shares are up around 10% to close at 27.5 cents on Sept 2, valuing the company at $3.5 billion, trading at just 3.5 times historical earnings.

In her Aug 11 note, RHB Group Research analyst Hoe Lee Leng considers GAR fairly valued, trading at 7 times FY2023 P/E in line with its peer range of 6 to 11 times. She says that share prices have reacted negatively to the recent CPO price decline, resulting in the average P/Es of the planters under its coverage shrinking to 10 times in FY2023, with the Malaysian big-caps trading in the range of 14 to 18 times.

&ldquo Although there could be more downside in 2HFY2022 as CPO prices moderate further, valuations for some planters are starting to look more interesting at these levels,&rdquo says Hoe, who has a &ldquo neutral&rdquo call and 30 cents price target on the stock.

Meanwhile, OCBC Investment Research analyst Chu Peng values GAR at 6.3 times FY2023 P/E versus peers  Wilmar International&rsquo s 10 times FY2023 P/E and  First Resources&rsquo 7.7 times FY2023 P/E. Chu has a &ldquo hold&rdquo call and fair value estimate of 30 cents on GAR.

For Fung, GAR has some positive trends in its favour, but at the end of the day, just like any commodities industry, its business is inherently volatile. On Aug 31, GAR announced that the separate planned listing of India subsidiary Gemini Edibles & Fats would be suspended because of &ldquo adverse and uncertain market conditions&rdquo . The planned listing was first announced last year. GAR will remain vigilant of developments in the world that could cause short-term volatilities, such as the geopolitical situation in Europe and the ongoing Covid-19 pandemic, says Fung.

Specifically, the conflict in Ukraine has put pressure on the sunflower oil supply, which further tightens the supply and demand balance of vegetable oils. This contributed to the historically high CPO prices earlier this year. &ldquo Despite the logistic challenges we&rsquo ve seen, we think our integrated business model is helping GAR whether the industry volatility. We have a broad product portfolio which means we can shift to different products &mdash this, on top of our global strategic logistic assets as well as a large and diversified pool of destination markets, has allowed us to distribute our products worldwide effectively,&rdquo says Fung.

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The supply of the various significant types of vegetable oil is set to grow slower than before. Fung explains that the supply of the three major vegetable oils aside from palm oil &mdash soybean, sunflower and canola (rapeseed) oils are growing in the low single digits on average over the last couple of years due to expanding arable land.

&ldquo Palm oil was the most significant contributor to the vegetable oil supply &mdash 10 years ago, it used to grow at high single-digit rates per year. It has come down to low to mid-single digits because of sustainability concerns and a lack of plantation expansion. As a result, we see a structural slowdown in supply.

&ldquo The demand for palm oil continues to grow strongly for food and biodiesel purposes. We believe the current CPO price levels are sustainable until the end of the year. While prices have come off recently, they are still well above historic averages,&rdquo adds Fung.

But given how the industry is responsible for providing what a consumer necessity is, they face regular intervention from the regulators. For one, Indonesia has implemented policy interventions such as imposing domestic market obligations (DMO), which bans the exports of palm oil products. Effective July 20, the Indonesian government has also launched the B35 policy, which raises the biodiesel mandate to 35% from 30% to reduce palm oil inventories following the ban.

Recognising that the palm oil industry is of strategic importance to the Indonesian economy, GAR believes that the Indonesian government will find a sustainable and strategic policy to maintain the industry&rsquo s long-term competitiveness, says Fung. &ldquo Recently, the Indonesian government made export attractive by temporarily suspending the levy on palm oil exports, which can reduce the current high stock levels. We will continue to support and comply with government regulations, focusing on affordable cooking oil availability in Indonesia.&rdquo

Indonesia had temporarily suspended the levy from July 15 to Aug 31 to boost exports and increase domestic prices. It had recently extended the suspension to Oct 31, amid efforts to prop up farmers&rsquo prices for fresh palm oil.

Further opportunities in Indonesia

RHB&rsquo s Hoe believes that supply constraints will remain on labour issues in Malaysia until the end of 2022 and slow exports from Ukraine. Fung clarifies that GAR does not face labour shortage issues like Malaysian planters, which rely heavily on foreign labour.

The cost of fertiliser, however, presents a challenge. &ldquo Fertiliser prices have increased in line with the increase in crude oil prices. This year, we expect an average increase of about 50%, which has increased our production cost by 10% to 15%. As commodities, both fertiliser and crude oil prices are in line with the CPO price trend, mitigating the impact on the profitability of our upstream business,&rdquo Fung explains.

In terms of weather conditions, there has been high rainfall over the past few months in certain regions, but it did not cause any disruption in GAR&rsquo s operations. The company&rsquo s 1HFY2022 nucleus fresh fruit bunches (FFB) dropped 6.5% y-o-y despite a 9% y-o-y rise in 2QFY2022 FFB output. For FY2022, GAR is guiding a slightly lower FFB growth of 4%, expecting 3Q to be the peak quarter. &ldquo We believe we can see higher production for this full year than last year because we expect a stronger second half of the year,&rdquo says Fung.

Looking at the major consumer trends, GAR sees that its consumers are getting more sophisticated and no longer only seeking the cheapest products they can buy. Instead, they want healthier and more sustainably-produced products. Through its research and technology investments, GAR is looking at focusing on this demand shift to boost the value creation of its business.

GAR also sees further opportunities in Indonesia, where it has long-established brands in its growing consumer food industry. &ldquo The future of this industry is bright, as Indonesia is a developing country with rapid growth in population and income. Continuing investment in e-logistics and e-commerce technology plays a critical role as the pathway to build our full-service distribution capability &mdash from end-to-end supply chain management to sales and marketing.

 

Golden-Agri announced plans on Aug 8 last year to list Gemini Edibles and Fats India. 

 

SINGAPORE - Golden Agri-Resources on Wednesday said plans to list its India subsidiary on both the Bombay Stock Exchange and National Stock Exchange of India will be suspended.

 

Gemini Edibles and Fats (GEF) India is in the process of finalising its application to suspend its proposed listing due to " adverse and uncertain market conditions" , the palm oil producer said in a bourse filing.

 

Golden Agri-Resources announced plans on Aug 8, 2021, to list GEF. It said at the time that it could get 7.5 billion rupees (S$132 million) from the initial public offering. It owns 56.3 per cent of the subsidiary.

 

" The company and GEF will continue to explore opportunities to enhance shareholders' value," Golden Agri-Resources said.

 

GEF, which is incorporated in India, is engaged in the manufacturing, distribution and branding of edible oils and speciality fats. Its product portfolio includes sunflower oil and rice bran oil, as well as speciality fats for biscuits and confectionery.

Timelines on initiate US$100 million share buyback to further reward shareholders

 

On 1st March 2022, Co announced 2nd half 2021 and 2021 full year results.
 

In the press release, it was announced:

 

" GAR will also initiate a share buyback programme to further reward our shareholders,

allocating up to US$100 million for year 2022. "

 

On 2nd March 2022, co announced sharebuyback on 1 March 2022 of 10.4 million shares at 3 cents.

 

On 9th March 2022, co announced a SSH sold 28,215,500 shares at 3.261 per share on 4th March 2022.  This caused the SSH to fall just below just the 5% SSH benchmark (4.98 with 634million shares).   

 

Since then, no share buyback, no news on US$100 million fund for share buyback 

although announced in press release and Annual report.

Hope the Co is not suffering from amnesia.