This strategy could help offset firm' s higher cost of production amid tough economic environment

 

A FALL in crude palm oil (CPO) prices in the first half of this year could make 2020 challenging for the Singapore-listed palm oil counters, but Golden Agri-Resources (GAR) appears to be having a particularly tough time. The company, already loss-making, has a higher cost base and a more mature plantation profile than some of its peers. But management plans to make up for these various pressures by growing its downstream operations.

 

For the first half of the year, GAR sank deeper into the red with a net loss of US$156.9 million - compared to a net loss of US$46.4 million for the year-ago period. The decline was due in part to a foreign exchange translation loss and deferred tax expenses.

 

The group' s revenue had in fact increased by 7.1 per cent to US$3.4 billion from US$3.2 billion a year ago, as average selling prices during the period were higher year on year (yoy). According to the company, CPO market prices had averaged 24 per cent higher yoy at US$616 per tonne.

 

But after accounting for its cost of sales, selling expenses, and general and administrative expenses, GAR' s operating profit for the period declined 44.6 per cent to US$11.7 million.

 

The company also booked a foreign exchange loss of US$48.3 million, versus a foreign exchange gain of US$3.2 million in H1 FY19.

 

Richard Fung, GAR' s director of investor relations, told The Business Times that the company' s financial performance was, and will continue to be, impacted by factors such as the international CPO price, production volumes and the cost of production.

 

Said Mr Fung: " Cost of production will be affected by production level and the appreciation/depreciation of the rupiah against (the US dollar)."

 

GAR' s cost of production was recently flagged by Fitch Ratings in a peer review of Asian CPO players. According to Fitch, although the company has the second-largest planted area in the world, it has a " below-average cost position" as well as older plantations.

 

The Fitch report, dated Sept 8, noted that although GAR' s fresh fruit bunch (FFB) yield and oil extraction rate (OER) were " broadly in line with the industry average" from 2017 to 2019, the company' s performance is at risk of falling " below the average" in the next two to three years due to its " mature acreage" while other companies benefit from younger plantations. Prime mature and old trees currently constitute some 80 per cent of the company' s total planted acreage, which may limit potential for overall yield improvement.

 

Fitch acknowledged, however, that the company has been replanting its old acreage with new generation seeds, which may " mitigate yield-related risks" over the longer term. GAR has accelerated replanting over the past 12 to 18 months, and expects this pace to be sustained, the report said.

 

It also flagged GAR' s " weaker" financial profile. Net debt was just over eight times the level of its earnings before interest, taxes, depreciation and amortisation (Ebitda), Fitch said, while the ratio of its Ebitda to interest has declined from 4.5 times in 2017 to around 2.5 in 2019.

 

" GAR has sustained high leverage of around 6 times or higher in the last four years, as the company relies on significant short-term debt to fund working capital for its downstream and trading operations," Fitch said.

 

Relative to some of its Singapore-listed peers, GAR' s recent earnings performance has been poor.

 

Wilmar International saw its net profit excluding discontinued operations for H1 increase 38.7 per cent to US$610.9 million on the back of improved contributions across all its core segments. Its plantation and sugar milling segment continued to be in the red, but losses narrowed to US$82.9 million from US$103.5 million in the year-ago period as the higher CPO prices yoy led to better performance from its palm oil plantation business.

 

Bumitama Agri, meanwhile, posted H1 net profit of 441.3 billion rupiah (S$40.8 million), which was 87.6 per cent higher than a year ago. The group said that its overall performance for the period had " significantly improved" due to strengthening prices.

 

First Resources, too, booked a 47.8 per cent rise in its net profit for H1 to US$43.2 million from US$29.3 million last year due to higher average selling prices for its crude palm oil and refined products. This was despite revenue for the period falling 5.1 per cent to US$278.2 million on the back of lower sales volumes for its palm-based products.

 

Looking ahead, Fitch said the CPO industry is " cyclical with significant price volatility." Producers with stronger plantation profiles, productivity and cost positions, along with conservative financial metrics, are " better placed to navigate the cyclicality and have stable credit profiles."

 

Anita Neville, senior vice president of corporate communications at GAR, told BT that the company has been aware that the " pressure on commodity prices was going to be a factor in the long-term future."

 

Ms Neville said GAR' s " value-added" diversification into the downstream business of refining and trading of palm oil, has reduced its sole reliance on the upstream business of operating plantations and palm oil mills.

 

She added that GAR has also made " strategic investments" in sugar trading and oleochemicals in a bid to guard itself against the volatility of CPO prices.

 

" (These investments) were part of us looking at how we could extract the maximum value from products that we' re able to produce from palm oil, and not have a bulk (of revenue) from just palm oil alone, which would make the company vulnerable to price fluctuations."

 

Ms Neville said investors can expect to see " higher rates of production and improved performance" in the second half of the year.

 

She added that although the palm oil sector has " traditionally been quite conservative and very manual" in most aspects of its operations, the company is now using technology to delve deeper into the operational performance of its plantations. Such efforts include the close monitoring of yields, harvest rates and tree health.

 

GAR' s shares have declined 42 per cent year to date, to close at 14.5 Singapore cents on Thursday. That values the company at S$1.85 billion and 16.1 times its historical earnings.