Golden Agri-Resources Ltd - MANAGEMENT REPLY: What explains a disproportionate increase in the fair value of its biological assets in the last 10 years?

16/3/2015 - Golden Agri-Resources Ltd says it is reviewing its business strategy for its oilseed business, to improve the operating performance.

It recorded a US$59.9 mln EBITDA loss from the division in 2014, compared to a US$25.8 mln EBITDA profit in the previous year.

In this report, we have also made an attempt to dig deeper into the valuations of its palm plantation assets worth billions of US dollars.

With the help of International Accounting Standard (IAS) 41, the company values thousands of hectares of palm plantations on the basis of the net present value of the expected cash flows from every palm tree's 25 years of lifetime.

Thanks to the accounting practice, the company has recorded billions of dollars in fair value gains in the last 10 years.

And the size of the gains can be estimated from the fact that about 88% of its accumulated profits are made up of the fair value gains on its biological assets recognised over that time.

We have emailed the questions to the company and invited them for an on-camera interview.

It would be ideal if Golden Agri could take us through the fair value estimation model for its biological assets and provide explanations/reasons for the assumptions that went into the calculations.

Before getting into this story, let us look at the company's just announced earnings for Q4 2014:

Revenue: -4.2% to US$1.82 bln
Profit/(Loss): (US$20.5 mln) vs US$123.7 mln
Fair value gain/(loss) on biological assets: (US$133.8 mln) vs US$36.9 mln
Forex gain/(loss): US$34 mln vs (US$17.5 mln)
Cash flow from operations: US$169.5 mln vs (US$82.1 mln)
Dividend: 0.177 Singapore cents per share vs 0.515 Singapore cents per share

Bullish analyst report

Bullish analyst report

OSK DMG expects the company to report stronger earnings in coming quarters.

Its oilseeds business turned profitable in Q4 while its biodiesel business could get a boost from Indonesia's plans to 'shore up the biodiesel sector', the broker added.

OSK DMG has upgraded the stock to BUY from NEUTRAL, with a target price of S$0.53.

UOB KayHian analyst Chan Yuan She expects the company's upstream business to drive earnings this year, with fresh fruit bunch (FFB) production forecast to rise 4% to 6%.

UOB KayHian has upgraded the stock to BUY from HOLD, with a target price of S$0.48.

Bearish analyst report

Bearish analyst report

OCBC Research finds the company's core earnings to be 1.3% below its forecast.

This year, the company expects to spend US$130 mln to expand its palm oil plantations through 'organic growth and acquisitions'.

In its downstream business, according to the broker, the company also plans to spend US$170 mln to 'extend product portfolio, distribution coverage and global market reach, as well as logistic facilities to enhance its integrated operations'.

OCBC Research doesn't expect to see any positive catalysts for the stock in the near term.

The broker feels the stock has corrected quite a bit and might have found a base around S$0.40.

The broker has reduced its 2015 earnings estimate by 5%-13% to factor in a weak outlook for Crude Palm Oil (CPO).

OCBC Research has upgraded the stock to HOLD from SELL but with a lower target price of S$0.42 from S$0.44 previously.

CIMB finds Golden Agri's 2014 core net profit of US$221 mln to be 10% above its forecast, but in line with consensus estimates.

Its aggressive expansion into downstream businesses in 2012 has not delivered good returns so far, due to poor refining margins and start-up costs for its new facilities and expansion in destination markets, added the broker.

The company has been successful in gaining market share but this appears to be at the expense of margins.

In 2014, sales volumes of its palm and laurics products grew 20% to 8 mln tonnes of palm products, representing around 27% of Indonesia's output.

Still, the PBT margin for this division fell to only US$1.5 per tonne from US$15.5 per tonne in 2013 possibly due to more aggressive selling to improve its distribution network.

The broker has pared its FY2015-2016 EPS forecasts by 2% and 13% to reflect the weaker refining margins.

CIMB maintains a HOLD rating on the stock but with a reduced target price of S$0.44 from S$0.50 earlier.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why did goodwill on its balance sheet increase by US$36.1 mln in 2014?

We couldn't find any explanations in the interim quarterly earnings of the company for 2014.

Management ReplyThe increase in goodwill by US$36.1 million in 2014 was relating to the acquisition of two companies in 2014.

Question

2. Which "investee" company did it provide a US$500 mln corporate guarantee in 2013?

On page 86 of its 2013 annual report, the company said that it provided a corporate guarantee to a financial institution on US$500 mln worth of borrowings of an "entity owned by an investee".

However, it didn't disclose the name of that "investee" company or other details, such as the size of the stake Golden-Agri owns in it?

Also, when did it announce giving half a billion dollars corporate guarantee to the "investee" to its shareholders?

What is the risk that this guarantee will be called upon?

Management ReplyPlease refer to our announcement release to SGX on 13 March 2013 attached.

(Read the full story to get all 9 questions)

We thank the management for its responses.

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