Golden Agri-Resources' India IPO has possible growth potential

Singapore

SHARES of Golden Agri-Resources have not enjoyed much of a boost since the palm oil supplier announced plans to list its Indian subsidiary on both the Bombay Stock Exchange and National Stock Exchange of India.

The company had announced on the morning of Aug 8, a Sunday, that it could get 7.5 billion rupees or about US$100 million (S$136.9 million) from the initial public offering (IPO) of its 56.3-per-cent-owned subsidiary Gemini Edibles & Fats India (GEF).

GEF, which is incorporated in India, is engaged in the manufacturing, distribution and branding of edible oils and specialty fats. Its product portfolio includes sunflower oil, rice bran oil, as well as specialty fats for biscuits and confectionery.

Golden Agri shares had closed on Friday, Aug 6, at 24.5 Singapore cents. On Tuesday, Aug 10, when trading resumed, the counter rose as high as 25 cents before ending the day lower at 24 cents. Since then, Golden Agri shares have fluctuated within the range of 23 cents to 25 cents. They closed last week on Friday, Aug 13, at 24 cents.

The market reaction to Golden Agri's spin-off plans stands in contrast to the positive response that followed a similar announcement from peer Wilmar International late on the night of Aug 2. Wilmar's shares had finished that day at S$4.30. The following day they hit an intraday high of S$4.46 before settling at S$4.42. Wilmar closed on Friday, Aug 13, at S$4.44.

Those differing market reactions are, to some extent, warranted. RHB has estimated that Wilmar's listing of its unit Adani Wilmar could boost Wilmar's share price by about S$0.20 per share, assuming Adani Wilmar trades on par with its fast-moving consumer goods (FMCG) peers in India.

RHB's estimate for the impact on Golden Agri's share price is a much more moderate 4 to 6 cents per share.

Also, some analysts have suggested Wilmar could reward investors with a larger dividend upon a successful listing of Adani Wilmar.

Although RHB thinks a dividend payout is also a possibility for Golden Agri, the brokerage said the money raised from the GEF IPO might also be used to pare debt. On a recent call to discuss Golden Agri's financial results for the first half of the year, director of investor relations Richard Fung said that the money collected from the IPO will be used for general operating expenses. Nevertheless, analysts said Golden Agri shareholders can look forward to growth potential for GEF in India.

The country is one of the largest importers and consumers of palm oil, and shares of both GEF and Adani Wilmar could perform well.

"Emerging markets have traditionally been a source of higher returns for investors. With its young population, India is also a key consumer market," said Justin Tang, head of Asia research at United First Partners. Mr Tang is expecting the Indian economy to benefit from a return to normalcy and pent-up demand as it recovers from the worst of the pandemic.

RHB, meanwhile, noted that consumption in India will benefit from factors such as the population growth, rising affluence and consumerism.

GEF's draft prospectus shows the company reported revenue of 77.7 billion rupees for the financial year ended March 31, up 19.5 per cent from 65 billion rupees in the prior year. Net profit was 5.7 billion rupees, up from 1.9 billion rupees.

Golden Agri posted net profit of US$153.2 million for H1 FY2020 ended June, reversing from a net loss of US$156.9 million in the year-earlier period. Revenue for the period rose 31.4 per cent to US$4.5 billion, from US$3.4 billion.

The company declared an interim dividend of 0.528 cent per share, versus no dividend in the year-earlier period.