Saturday, 2 November 2013

Understanding Plantation Sector

The Crude Palm Oil (CPO) price has fallen from a high of RM3,800/MT in early 2011 to RM2,300/MT now, which is about 40% down. 

       CPO price 2003-2013

Thus, plantation sector is rather "cold" at the moment and I thought it might be a good time to look for some undervalued plantation companies.

There are buy calls from some analysts on plantation stocks recently as the CPO price is widely expected to bottom out soon. However, after a brief screening through the plantation stocks, it seems like they are not cheap at all. Those with lower PE are going to suffer significant drop in earnings in current financial year.

Previously I have not studied a single plantation company or buy their shares as I don't know much about its business. Furthermore, almost all plantation companies' revenue and profit will not show a consistent growth that I usually look for. They fluctuate a lot according to various reasons such as CPO price.

I have heard of things like fresh fruit bunch, palm maturity profile, mills etc but never really know much about them.

However, it's good to know some basic about the plantation business so that we can act quickly when the chance arise.

I have found some useful info from the internet, mainly from MPOC (Malaysia Palm Oil Council). This information may be good for beginners like me.

Malaysia Oil Pam Industry Statistics

  • 4.49 million hectares land planted with oil palm
  • 17.73 million tonnes palm oil produced annually
  • 2.13 million tonnes palm kernel oil produced annually
  • Malaysia has 39% of world palm oil production
  • Malaysia has 44% of world palm oil export
  • Malaysia has 11% of world's oil & fat production
  • Malaysia has 27% of world's export of oil & fat
  • It is Malaysia 2nd largest export revenue
  • It makes up 3.2% of Malaysia GDP in 2008

       Annual CPO production in Malaysia

Oil Palm Trees
  • Takes 30 months after planting to start to bear fruits (produce revenue)
  • 4-7 years old trees are young palms & give less yield
  • 8-20 years old trees are considered at prime age & give higher yield
  • Trees >20 years are old and give less yield
  • Trees >25 years are very old, give less yield, difficult to harvest (tall) & are ready for replanting
  • Fresh fruit bunch (FFB) refers to a bunch of ripe fruits, measured in tonnes.
  • One hectare of oil palm plantation can yield about 20MT of FFB per year.
  • One hectare of oil palm plantation can yield 4-5 tonnes of CPO per year.
  • Oil palm is the most efficient oil-bearing crops in term of oil yield per hectare.

       Fresh Fruit Bunch (FFB)

Palm Oil
  • FFB can produce 2 types of oil: crude palm oil (from mesocarp) & crude palm kernel oil (from kernel /seed).
  • Palm oil can be refined into: palm olein (cooking oil) & palm stearin (shortening/margarine).
  • It is widely used in foods, cleaning agents & cosmetics. So the demand will grow with world population growth.
  • The demand of palm oil will be much higher if bio-fuel research is successful.
  • Palm oil faces competition from other plant-based oil source especially soybean oil from the America.

       Mesocarp (yellow) & kernel (white)

Palm Oil Processing
  • Harvested FFB will be sent to palm oil mills for processing to produce crude palm oil & crude palm kernel oil.
  • Big plantation companies will have their own palm oil mills but small estate holders usually don't.
  • CPO & CPKO will be further refined to get a wide range of palm products of specified quality.
  • Upstream operation involves planting, harvesting & processing of FFB to obtain CPO/CPKO.
  • Downstream operation involves further refining of CPO to obtain RBD palm oil (Refined, Bleached & Deodorized).
  • Some plantation companies in Malaysia involve solely in upstream and some bigger companies (IOI, Sime, KLK, FGV etc) have both.

Profitability & Quality of Plantation Company
  • Yield, in term of FFB in tonnes/hectare and oil extraction rate (OER). The higher the better
  • Palm trees maturity profile & replanting strategy
  • Available landbanks & land acquisition for future growth
  • Efficiency of estate management & cost control in day to day operation - labour, infrastructure, facilities, pesticides, transportation etc.
  • R&D to produce better seeds or system for higher yield.
  • Environmental friendly
  • Of course high ROE, ROA, DY and low D/E, PE.

Most plantation companies listed in Bursa Malaysia involve only in oil palm plantation. Some of them do have rubber, cocoa or coconut plantation but their contribution are relatively small.

For me, most of the plantation stocks PE are quite high now. I'm not sure what should be the acceptable PE of this sector though. 

Personally I still don't think it is a good time for me to buy my first plantation stock even though the CPO price is lowish. However, I will try to pick a good one into my watch list.

Anyone who have good recommendation or information are welcomed to share :)

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