2014-03-18 [FA][ ] Plantation Companies With Best Growth Potential (Part 1/2)

source: [Bursa Dummy]

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.