Posted on 03 Apr 2019
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Hi guys I will just share some news, updates and insights that I have here.
TL;DR: GAR has one of the largest palm oil plantations of the world. Financially, it experiecned a sizable decrease in net profit and is heavily reliant on how it manages its short term cashflows. They have also also invested in other businesses and tried to value-add on their commodity products. Overall, GAR has got good differentiating factors but needs to mitigate its risk of existing in the commodity business.
Golden Agri-Resources (GAR) has one of the largest palm oil plantation companies in the world, with in Indonesia. They manage more than 498,000 hectares of palm oil plantations and also are a seed-to-shelf agribusiness, which includes growing oil palms with farmers to producing food and fuel for the present and future.
After experincing YOY increase since 2015, revenue decreased in 2018. The increase in fiance costs, negative share of results from joint ventures and increase in general expenses led to a decrease in profitability. The increase in income taxes paid also contributed to this decrease. As GAR operates in the commodity business, the business has much higher amount of inventory as compared to other businesses. Short and long term borrowings both form an important part of financing and capital structure and increase in taxes affected operating cashflow significantly. Proceeds from dilution of interests from subsidiary and proceeds from notes issuance improved their overall cashflow as well.
The scale of GAR, in terms of land size and production means that it is able to spread its economies of scale, which can reduce costs and improve profitability even further. GAR has this asset as a differentiating factor from its competitors.
Another form of growth opportunity is through the tapping of distirbution and sale networks in China and strengthening business relationships with reputable customers by pursuing additional value-added services. This should be a boost since China is the largest edible oil market in the world.
One of the biggest risk of having being in this industry is its cyclical nature. This can be observed from how revenue had changed over the years due to differences in Crude Palm Oil prices.
Another major risk is at stake is how cashflow is managed through working capital, such as Accounts Receivables, Inventory and Payables, with all 3 taking up sizable portions of the Balance Sheet. Shortining its receivables and inventory extending its paybles had help manage short-term cashflow and reduce risk.
The scale and maturity of the business is one of the key differentiating factors of this business, with possible growth opportunities to be reaped through economies of scale and further expansion into the Chinese market. That being said, the risks of commodities businesses need to be carefully watched.
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