Tuesday, 18 March 2014

Plantation Companies With Best Growth Potential (Part 1/2)

CPO price has advanced 25% from RM2300 to the level of RM2900 since October last year. However, I still haven't own any plantation stock yet.

       Chart 1: CPO Price Chart

Personally I would like to look for a plantation company with great potential of growth, which means company with more young trees. However, I don't have much idea of how to find them until I read an article in The Edge last week: Planters with young palms to win big.

This article lists out 9 Malaysia-listed plantation companies with young palms. I think I should concentrate on them, together with 2 Singapore-listed companies which I knew earlier: First Resources & Bumitama Agri, in which all their estates are in Indonesia.

As I don't subscribe to any analyst reports, I obtain all the information through online search and annual reports. Thus the figures presented here may not be up-to-date. If I can't find certain information for certain company, I'll just leave it blank.

Surely, I may also miss some other great companies with good potential as well.

First, lets have a quick look at how big these companies are by using the simple market capitalization method.

Table 1: Market Capitalization
Maket Cap (RM mil)
First Resources FR 9894
Genting Plantation GENP 8122
Bumitama Agri BUMI 4805
TSH Resources TSH 2892
IJM Plantation IJMP 2882
Sarawak Oil Palms SOP 2774
Jaya Tiasa JT 2629
TH Plantation THP 1800
Ta Ann TA 1635
TDM Berhad TM 1408

Out of these 10 companies, a few are not pure planters: Jaya Tiasa & Ta Ann (logging), GentingP & SOP (property) and TDM (healthcare). However, plantation segment contributes significantly to their earnings. I do not include MKH because it is mainly a property developer, although almost 100% of its palms are below 7 years old.

Because of the reason above, total planted land area might be more accurate to show how big these planters are.

       Chart 2: Planted land area

First Resources, Bumitama and Genting Plantation are much bigger planters with more than 2 times more planted land compared to others. Other planters are more or less the same.

In term of FFB harvested (from own estates), of course those with larger plantation land harvest more. 

Table 2: Annual FFB/CPO/PK Production

FR 2,266,866 625,202 136,966 Dec13
BUMI 1,620,211 522,743 99,397 Dec13
GENP 1,391,300

SOP 887,425 347,548 73,871 Dec12
IJMP 692,210 182,154 40,472 Mac13
JT 666,899 59,680 9,606 Jun13
TSH 542,951 312,644 69,302 Dec13
THP 524,665 98,975 27,151 Dec12
TA 505,205 80,421 15,003 Dec12
TDM 487,090 98,291 25,642 Dec13

All companies here have their own palm oil mills. The palm oil and palm kernel produced include those produced from FFB purchased from third parties or small holders.

I think it is also important to take into consideration the operating efficiency of these plantation companies, which is best represented by FFB yield, CPO yield, oil extract rate (OER) & kernel extract rate (KER).

If the seeds are of high quality and the plantation estate has good soil and is well taken care of (fertilizer, disease & pest control), it should have a higher yield.

However, the yield can be affected by the maturity stage of trees in which high percentage of below prime age trees will drag down the yield.

The charts below show the FFB/CPO yield and OER that I can get from my search.

       Chart 3: FFB & CPO Yield

       Chart 4: Oil Extraction Rate

IJMP seems to have high FFB yield and CPO yield but it is stated that they are actually yield per mature hectare. Other companies figure might have been diluted by immature plants.

JTiasa stands out for the wrong reason here. It has the lowest FFB/hectare & OER at only 13.9MT & 14.63% respectively. Is it because of dilution from its high percentage of immature trees? Is its significantly lower OER because of poor quality of its FFB with low oil content or poor performance of its mills?

From chart 2 above we can see that the total planted area for JTiasa & SOP are almost similar at slightly above 60,000 ha. However, the FFB production of SOP is 33% more than SOP (Table 2).

Generally, oil palm trees will give highest yield in their prime age, which is from 8 to 18 years old. Trees below 4 years are immature while between 4-8 are considered young.

       Chart 5: Yield by Age

So, those companies with high percentage of palms from 0-7 years old may have lower FFB yield but should experience exponential growth in the short and medium term from now.

The table below shows the age profile of these 10 companies. Anyway, the definition of the tree's age groups are slightly different between the companies.

Table 3: Palm Tree Age Profile 
In % Immature Young Mature Old
BUMI 32.0 43.0 25.0
FR 29.1 29.7 33.2 8.0
TA 13.3 12.7 74.0
JT 23.5 64.2 12.3
IJMP 47.4 8.8 39.6 4.2
THP 39.4 25.1 27.6 7.9
SOP 28.7 39.7 23.8 7.8
TSH 40.0 30.0 30.0
GENP 28.0 9.7 35.5 5.8
TDM 36.3 7.5 42.7 13.4

If we combine immature and young plants, the chart will look like this.

        Chart 6: Percentage of Palm Trees Below 7 Years

It is clear that JTiasa has the largest percentage of young & immature trees at a whooping 87.8%, followed in descending order by Bumitama, TSH, SOP and THPlant.

This may explain JTiasa's low overall FFB yield. In its presentation, JTiasa says that its prime mature palm trees at 10 years old achieve high FFB yield of 27.2MT/ha!

       Chart 7: Jaya Tiasa's FFB Yield According To Tree Age

Besides, it is also notable that JTiasa, Bumitama & SOP have high percentage of trees in young group, thus they don't need to wait too long to see massive FFB production growth.

In term of latest YoY FFB growth, TSH achieves an impressive 27.8% growth even almost 70% of its trees are still either young and immature. Bumitama, JTiasa & Ta Ann are also not bad with more than 10% growth.

       Chart 8: FFB Year-on-Year Growth

Those with huge unplanted land will have a lot of potential to grow in long term. However, planters need lots of capital expenditure to do the planting and it may take up to 5-6 years after planting to break even in term of profit.

       Chart 9: Unplanted land

I believe that other large plantation companies in Malaysia such as IOI, KLK, Batu Kawan, Kulim, FGV etc are also not bad. However, I'm not going to study all of them now.

From the 10 companies above, the palm trees age profile (Table 3 & Chart 6) are the most important to me. So, one of them except TA, TDM & GENP will probably turn out to be the first plantation stock that I'll buy.

Next, I should study briefly the health of these company which include their debt/equity ratio, ROE and PE ratio.


  1. Hello when you study the income statements of First Resources & Bumitama Agri, take note on the "Gain arising from changes in fair value of biological assets". It's mandatory for plantation stocks listed in SGX to add in the valuation in their income statement. But, the fair value is just a valuation, will deduct out under the cash flow statement.

    So, i think it's better to deduct the fair value out to get the real net profit.

    My opinion ..

  2. Thanks CT for pointing this out. Will look into that :)

  3. Any reason why not look into other companies such as Kim Loong etc?

  4. Hi ikan bilis,

    Actually I did not screen through all the listed companies, I just follow the recommendation by an article from The Edge for plantation companies with more young trees. So I may miss out on a few good companies.

    As suggested in the title of this article, I'm looking for high growth in the future. I've briefly gone thru Kim Loong's FY13 annual report, its immature trees are only 10% of total planted area, so it's not what I want although it is still a well-managed company I guess.

  5. OK. thanks. Appreciate your analysis, I've learned a lot. Enjoyed reading you blog.

    Question, do you have analysis on the R&D effort of those companies? I always believe that company which willing to spend money on R&D has long term future because they can own their technology.

  6. Ikan bilis, thanks for your kind words.

    Unfortunately I couldn't find a lot of info regarding the R&D side of plantation companies. I guess most big planters will have their own labs and research, but not sure who is doing better. TSH might be the one that stands out in this area.