Sunday, November 3, 2013

Golden Agri -- 6 months review, Is the story intact?

Golden agri is now above my purchase price, is the story intact, getting worse, or getting better?

I think the story is intact, but it is not getting better.

I bought golden agri for it high correlation to CPO price, I felt CPO is already in doldrums, and given golden agri vertically integrated operations and healthy balance sheet, it should be able to ride out the doldrums and worth much more when CPO price recovers. Golden agri is also a purist, as compared to wilmar, it business is mainly in CPO, China form just a very small part of its operations.

However, I felt the recent run(close to 15%) in price is not actually back by fundamentals.

1) CPO price still depressed

2) Golden agri should/might have its first revaluation loss in years (lowest 3-year average price of CPO, and production plateau, means no way to use volume to offset weak margins )when they announce full year results

3) Indonesia currency weakest in recent years.

Wait a minute, shouldn't that means story is worsening.

No, because with the exception of point 3, I already expect point 1 and 2 when I invested, and I expect Q3 to be a weak quarter, as long as no loss is incurred, I will not waver. Given the Indonesia subsidiary is still eking a profits, I believe a weak profits is not a tall order.

Some good development too, although I wouldn't count on them.

1) Biodiesel law  in Indonesia and Malaysia could increase demand for CPO, a natural choice for Bio-fuel mix for diesel. Reuters report Golden agri is building a refinery for bio-fuel, although there is no confirmation from golden agri

2) Inventories continue to fall, and stablizes, China operations has stablizes too.

3) Scathing attack on Wilmar by greenpeace when golden agri is going on a "responsible corporate promising sustainability in CPO industry" PR drive... I hope they are really doing the good work, which they should.

Point 1 will take years to make an impact, point 2 situation is highly fluid and might reverse anytime. Point 3 seem achievable.

There are many a times when golden agri goes near the 50 cents mark and I feel like accumulating, but I will stick to my plans of accumulating when it falls by more than 10% if the story is intact, if the story changes for better, I might accumulate more. The story is unlikely to change over the next quarter. Will update if there is nasty surprises or good news in their Q3 report. For me, I expect a QoQ fall in profits, but not a loss. I believe many did not factor in valuation losses in full year results, which is non-cash in nature, I believe I will still have a window of buying opportunity

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