Golden Agri Corporation's palm oil production and market operations

Con Agri

Golden Agri is a Singapore-based company that specializes in palm oil production. The company was incorporated in Mauritius in 1996 and has grown since that time. It was listed on the Singapore stock exchange in 1999, having already established a presence in Indonesia. The company entered the Chinese market in 2005, the second market where it operates on a palm oil producer. The company currently produces 1.7 million tons of crude palm oil annually. Some of the production is marketed directly as palm oil while some of the production is turned into cooking oils and other value-added products (GoldenAgri.com.sg, 2010). This paper will first outline the company in brief. A longer examination will be made of Golden Agri's strengths and weaknesses, including an examination of the company's finances for the past three years.

I Background of the Company

Golden Agri was incorporated in Mauritius in 1996 and is traded on the Singapore stock exchange. Golden Agri operates palm plantations, primarily in Indonesia but also in China as well with soybeans. The company then markets the palm products in both raw and finished forms. The company's vision is detailed on their website as follows: "We aim to be the best - to be the largest integrated and most profitable oil palm-based consumer company." (Ibid). Golden Agri has listed as its mission the following:

Surpassing the highest standards of Quality

Maintaining the highest level of Integrity

Achieving maximum value for our Shareholders

Returns to Society and Community

II. Financial Analysis

The term 'financial statements' refers to the basic statements that are produced by every public company in accordance with established reporting principles. These statements are the income statement, the balance sheet, the statement of cash flows and a statement of changes in equity. The term is also inclusive of the notes to the financial statements, in which many of the figures presented in the statements are explained in detail sufficient enough to provide sound insight into the company's finances by outside parties.

Organizations use financial statements to measure their performance in a number of ways. One way is through comparison with past statements. The past statements are a benchmark against which the company evaluates the current statements. The second way is that the statements are used to compare against the statements of other, similar companies. This gives the firm insight as to where its performance stands in relation to that of its closest competitors. The third way in which firms use financial statements to evaluate firm performance is through ratio analysis. Companies calculate a series of ratios based on the figures and then use these ratios to help gain insight into specific areas of success or concern.

There are several types of ratios that are analyzed. These include liquidity ratios, debt ratios, profitability ratios and efficiency ratios. Golden Agri's liquidity ratios provide insight into the company's short-term financial health. The first liquidity ratio is the current ratio. For Golden Agri this is 1.29 for 2008, 1.47 for 2007 and 1.22 for 2006. The quick ratio is 0.5 for 2008, 0.51 for 2007 and 0.8 in 2006. The cash ratio is 0.25 in 2008, 0.28 in 2007 and 0.37. These figures indicate two things. Golden Agri has acceptable liquidity, in particular with its current ratio, although the other ratios are reasonable as well. However, the company's liquidity position has deteriorated in the past two-year, as all three ratios have declined over this period. That this decline is evidence in all three ratios indicates a broad-based deterioration of the company's liquidity position.

Golden Agri has a debt ratio in 2008 of 0.31, with the single largest component of liabilities being deferred income taxes. Long-term debt is a very low component of Golden Agri's capital structure. The debt ratio in 2007 was 0.325 and in 2006 it was 0.35. The debt-to-equity ratio in 2008 was 0.45 and in 2007 this was 0.48, down from 0.52 in 2006. The interest coverage, as measured by the operating profit divided by the financial expenses, in 2008 was 48 times, and in 2007 this was 50.2 times but just 33 times in 2006. What the debt ratios indicate about Golden Agri is that the firm has a relatively low level of debt. Most of the company's financing comes from equity. The interest coverage ratios are very high, indicative of the low level of interest the company pays on what little debt it has. The debt and debt-to-equity ratios are relatively low, indicating that there may be strategic reasons for keeping the capital structure weighted towards equity. Gearing increases the firm's risk, which may not be desirable for a company like Golden Agri that is so dependent on the price of a globally-traded commodity for its revenues.

The profitability ratios measure the ability of the firm to convert revenues into profit. These include the gross margin, the operating margin and the net margin. The gross margin for 2008 was 29.3%, for 2007 it was 35% and for 2006 it was 24%. The operating margin for 2008 was 66.5%, for 2007 it was 93.8% and for 2006 it was 69%. The net margin for 2008 was 47.5%, for 2007 this was 96.2% and for 2006 it was 47.7%. These figures are unusual, as typically the net margin is smaller than the operating margin, which is smaller than the gross margin. Essentially this anomaly stems from the treatment of the net gain from changes in the fair value of biological assets. In other words, the profit on the income statement reflects more the gain in the value of the palm plantations than it does the gains from the processing, production and marketing of the palm. This gain spiked in 2007 relative to the other two years, which demonstrate a more stable trend. The firm's cost structure is, however, low. If that net gain is eliminated from the calculation, the net margin for 2008 would have been 16.4% and for 2007 it would have been 27.6%. This indicates that Golden Agri enjoys healthy profits even without taking into consideration the gains on its biological assets. Those profits, however, declined sharply in 2008 from the previous year.

The efficiency ratios are used to evaluate the efficiency of the company's use of its assets and its equity. The return on assets for Golden Agri in 2008 was 20.7%, for 2007 it was 25.4% and for 2006 it was 24.7%. The return on equity for 2008 was 30.1%, for 2007 was 37.6% and for 2006 it was 38.5%. These ratios indicate that the firm was not as efficient in 2008 as it was in 2007 or 2006. The performance with respect to returns was poorer, although this particular statistic does not lend an indication as to why the returns were weaker. Inventory turn was 12 times in 2008, 6 times in 2007 and 7.8 times in 2006. Receivables turn was 21.3 times in 2008, 15.7 times in 2007 and 25 times in 2006. These ratios indicate that there was a higher degree of managerial efficiency in 2008 than the previous year, at least in terms of revenue generation, although the receivables turn in 2006 was exceptional. That the ratios built on the top line number improved while those built on the bottom line number deteriorated is to be expected, given that the net margin decreased significantly in that year.

In terms of non-financial strengths and weaknesses, Golden Agri is attempting to build competitive advantage through economies of scale with its plantations as this will ensure maximum efficiency in its milling and refining operations. The company also believes that vertical integration is critical to driving added value, by improving efficiency and by ensuring higher quality end products. It also views its research capabilities, its management team and its in-house seed supply as strengths from which it can draw competitive advantage. That said, the company appears to have a lack of cost control, which is a key weakness. In addition, it lacks diversification away from the palm oil business, with soybean oil being a relatively small component of its operation. Another weakness at Golden Agri is the lack of brand development. It has a large number of end-use products but many of these lack powerful, established brands. The company likely needs to offer more marketing support, as it has not competed in the retail sector long enough to build brand strength.

III Conclusion

There is no harm in Michael buying shares of Golden Agri, but to recommend that he do so would need to take into account both his own personal financial situation and the price of the shares at the present moment. The company is on sound financial footing, but is not well-diversified. There is cause for concern that many of Golden Agri's financial ratios have deteriorated in the past year. The cost of sales has increased from 65% to 70% of revenues. Both selling and G&A expenses have increased significantly in the past year as well. That Golden Agri does not appear to have good control over its cost structure is a sign that caution should be taken when making the decision whether or not to invest in this company. There are no liquidity issues in the short-term, nor is the company's debt position in the long-term of any concern. Indeed, Golden Agri can take on significantly more debt than it already has. If there is any cause for concern, it is that Golden Agri is on a downward trend across most of its ratios. The firm has grown and it has expanded its product lines, but these investments do not appear to have manifested themselves in the revenue column as of yet. There are no strategic reasons why the company should reverse this trend soundly in the foreseeable future so all other things being equal I would not recommend that Michael purchase shares in Golden Agri.

Ratio

Formula

2006

2007

Current

Current Assets / Current Liabilities

424000 / 347916

1.22

763817 / 517791

1.47

707481 / 547989

1.29

Quick

Cash + Receivables / CL

279826 / 347916

0.8

452283 / 517791

0.81

459397 / 547989

0.84

Cash

Cash / CL

130388 / 347916

0.37

124487 / 517791

0.28

133214 / 547989

0.25

Debt

Liabilities / Assets

1064060 / 2985362

0.35

1631604 / 51012814

0.325

2118677 / 6825507

0.31

Debt to Equity

Liabilities / Equity

1064060 / 1921696

0.52

1631604 / 3381210

0.48

2118677 / 4706880

0.45

Interest Coverage

Operating Income / Int Exp

1129587 / 34157

33x

1873352 / 35507

50.2 x

2985948 / 41260

48 x

Gross Margin

Gross profit / revenue

269814 / 1129587

23.8%

658345 / 1873352

35%

876117 / 2985948

29.3%

Operating Margin

Operating Profit / Revenue

777556 / 1129587

69%

1757968 / 1873352

93.8%

1986316 / 2985948

66.5%

Net Margin

Net profit / Revenue

539531 / 129587

47.7%

1274375 / 1873352

96.2%

1418645 / 2985948

47.5%

ROA

EBIT / Assets

740583 / 2985362

24.7%

1802945 / 5012814

25.4%

1947060 / 6825507

20.7%

ROE

EBIT / Equity

740583 / 1921296

38.5%

1802945 / 3381210

37.6%

1947060 / 4706830

30.1%

Inventory Turnover

Revenue / Inventory

1129587 / 144174

7.8x

1873352 / 311534

6x

2985940 / 248084

12x

Receivables Turnover

Revenue / Receivables

1129587 / 45510

25x

1873352 / 119421

15.7x

2985940 / 140830

21.3x

Works Cited:

Golden Agri website. (2010). Retrieved March 21, 2010 from http://www.goldenagri.com.sg

Golden Agri 2008 Annual Report. Retrieved March 21, 2010 from http://www.goldenagri.com.sg/upload/E5H/Annual%20Reports/Completed%20Reports/2008/Golden%20Agri%20Annual%20Report%202008.pdf