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

At least for me, it is not easy to value a plantation company.

Since most companies' financial year end in December, at this time we can get their latest PE ratio for direct comparison.

However, I think current actual PE ratio does not show or predict the true value of plantation stocks, as the most important factor to value them is their future growth in earning, which are linked to FFB growth and future CPO price.

CPO price might not be easy to predict, but FFB growth is largely predictable.

If we have detail palm age profile or yearly new planted area, then we can roughly calculate the future FFB production base on historical FFB yield per hectare for certain tree age groups. 

So, companies with high PE ratio because of poor earning at the moment may see their earning suddenly jump tremendously due to substantial increase in FFB production, as majority of trees enter prime age.

As stated in Plantation Companies With Best Growth Potential (Part 1), companies with the largest percentage of immature & young trees below 7 years are as follow:

       Chart 1: Companies With The Most Young & Immature Trees

I think it is still useful to look into the latest PE ratio of those 10 plantation companies. All companies' PE ratio shown in the table below are the latest with FY end in December, except IJMP (Mac) & JT (Jun).

Table 1: PE Ratio

	PE Ratio
FR	13.4
TA	17.3
TSH	18.7
BUMI	19.7
IJMP	24.4
THP	28.0
SOP	29.3
TDM	30.0
GENP	35.0
JT	113.8

From the table above, JT might have a sky high PE ratio. However, it also has the highest FFB growth potential with the highest percentage of young & immature trees.

Both TSH and BUMI have relatively low PE ratio below 20x, and they also possess the highest percentage of young trees after JT. Thus, it seems like TSH and BUMI are the better bet at the moment.

FR has the lowest PE and decent percentage of young trees at 58.8%. It definitely looks good as well but why the market gives it a lower PE compared to its peers? There is a reason behind it.

There is another method to value a company which is Enterprise Value Multiple (EVM). It is calculated as EV/EBITDA. It roughly shows how many years it would take to pay off the acquisition cost if the company is to be acquired at enterprise value. Similar to PE ratio, the lower the better.


Table 2: EV/EBITDA

RM mil	EV	EBITDA	EV/EBITDA
FR	13085.1	1121.3	11.7
BUMI	6054.7	425.8	14.2
GENP	8185.4	373.1	21.9
TSH	3737.2	224.7	16.6
JT	3539.2	144.6	24.4
SOP	3296.7	250.0	13.2
THP	3015.3	169.9	17.7
IJMP	2938.8	*159.5	*18.4
TA	1877.6	155.9	12.0
TDM	1557.9	96.1	16.2

* EBIT only

From calculation of EVM, FR still has the lowest or best value. Besides, SOP, TDM & THP also looks better compared to their relatively high PE ratio. JT still has the highest numbers, but not as high as its PE due to its high depreciation and amortization in FY2013.

With limited information on hand, I'm unable to calculate the estimated FFB production and earning of these companies in the future. However, those professional analysts can.

Below are the current price and latest target price by analysts for these 10 companies. For consistency, I will quote the target price given by RHB as RHB covers most of these stocks. All the target price are derived after the release of company's latest financial results.

Table 3: Target Price & Potential Upside

Stocks	Actual Price	Target Price	Analyst	Potential Upside (%)
FR	2.33	2.70	MB	15.9
TA	4.28	5.00	RHB	16.8
TSH	3.16	3.19	RHB	1.0
BUMI	1.05	1.39	RHB	32.4
IJMP	3.3	3.80	KNG	15.2
THP	1.99	2.10	MIDF	5.5
SOP	6.5	7.04	RHB	8.3
TDM	0.93	1.04	RHB	11.8
GENP	10.5	11.20	RHB	6.7
JT	2.73	2.95	RHB	8.1

       Chart 2: Potential Upside of Share Price    

JT and TSH are thought to have exponential growth in the future, but the potential upside of their share price are just 8.1% & 1.0% respectively. However, this target price is for calendar year 2014, which means it has limited upside for this year only. In the next few years, "barring any unforeseen circumstances", both companies' FFB production and profit will go up substantially and their target price will be revised upwards.

Many investors have already taken position in some hot and great plantation stocks. This results in their relatively high share price with limited upside at the moment. For long term investors, the target price by analysts might not be that important.

Anyway, it is still desirable to find one with high potential upside in year 2014. Obviously there is one here, which is Bumitama. 

In term of NTA (net tangible assets), most companies' share prices are 2-3 times more than their NTAs. Only TDM which is not a pure plantation stock has share price closest to its NTA.

Table 4: NTA

	Price	NTA
FR	2.33	0.80
TA	4.28	2.72
TSH	3.16	1.19
BUMI	1.05	0.39
IJMP	3.3	1.60
THP	1.99	1.35
SOP	6.5	2.82
TDM	0.93	0.84
GENP	10.5	4.52
JT	2.73	1.80

Fundamental investors always look for companies with high ROE. Higher ROE means higher profitability in which the company can generate more profit from its shareholders fund.

Besides ROE, it is also important that the gearing is at a comfortable level. The lower the gearing, the less risky it is when unforeseen disaster strike the company or plantation industry.

       Chart 3: ROE and Gearing

First Resources has excellent ROE at 21.8%, while Bumitama and TSH also meet my selection criteria of around 15 and above.

It is obvious that those companies with high percentage of young trees through aggressive new planting in recent years have the highest net debt/equity ratio. If you own those companies with high gearing ratio, then better pray that their FFB production grows according to plan and no unforeseen circumstances strike within the next few years.

Personally I hope to own a pure plantation company but TA, JT, GENP, SOP & TDM are not. 

If not mistaken, only First Resources and SOP are involved in downstream business with palm oil processing and refining facilities. This is a plus point for me.

In summary, there is no "the best" plantation stock.

However, the one that caught my eyes is Bumitama, which stands out in all aspect except its lower FFB yield, slightly higher PE ratio and high gearing.

First Resources is also not bad at all with its excellent management (high ROE, low gearing with unbelievable margin), low PE ratio or EVM and more than 50% of young & immature trees. 

The worries for First Resources are the recent significant fall in FFB yield and also the expiry of its locked-in CPO forward sales at a high average selling price of around RM2850 throughout year 2012-2013. So, FR will depend more on its FFB production growth to drive up its revenue and profit in 2014, not the CPO price.

This may explain why the market gives FR a lower PE as the growth in profit for 2014 might be only a little or negative.

Anyway, I think FR is still a superb plantation stock to own in long term.

For Malaysia's side, I think I will go for a pure plantation company with high percentage of young trees, if I were to invest in one.

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

Company		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

	FFB(MT)	CPO(MT)	PK(MT)	As At
FR	2,266,866	625,202	136,966	Dec13
BUMI	1,620,211	522,743	99,397	Dec13
GENP	1,391,300			Dec12
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.