Following up on our previous introduction to the Crude Palm Oil (CPO) industry in our two posts titled, “Oil In The Palm Of Your Hands” Part I and Part II, today we bring to you some of the key fundamental factors to look out for companies operating in the CPO industry
Basically, CPO entities consist of operations from upstream all the way to downstream.
What’s the difference between upstream and downstream?
Upstream: Development, cultivation and management of oil palm plantations and estates as well as the milling of fresh fruit bunches (FFB) for CPO and CPKO (Crude Palm Kernel Oil)
A pure-play upstream entity would be Bumitama Agri Ltd (SGX: P8Z).
Downstream: Manufacturing and distribution of refined CPO products inclusive of oil and fats products, oleochemicals and palm-oil based biodiesels, as well as fast moving consumer goods
A pure-play downstream entity would be Mewah International Inc (SGX: MV4).
There are also fully integrated CPO entities, which is the domain of the big boys, with Golden Agri-Resources Ltd (SGX: E5H) being such a company.
3 things to look out for in CPO companies?
The scope of this analysis would be on the operational metrics for UPSTREAM ENTITIES.
The 3 things to look out for include:
1) Land area:
No matter how spins this tale, CPO companies are essentially in the commodities business. In the commodities business, size matters and it matters to quite a large extent.
To put it simply, the CPO industry isn’t rocket science. Every hectare of land gives you X amounts of fruits leading to $Y. There is a positive correlation between planted area and profits, ceteris paribus.
Within Singapore listed CPO entities, Golden Agri comes in tops with over 460,000 ha of planted area. On a global comparison of planted area, Golden Agri-Resources is second only to Sime Darby Bhd (SIME.KL). Sime Darby was the largest upstream player with planted area of over 500,000 ha. And they would only get larger if their potential acquisition of New Britain Palm Oil Limited (LON:NBPO) goes through. On 9 Oct 2014, Sime Darby offered an 85% premium to buy New Britain’s over 79,800 ha of palm oil plantations in Papua New Guinea.
2) FFB Yields:
One of the key metrics for upstream operations would be FFB yield. It measures how productive a mature (4th year onwards) planted area is, in terms of FFB in tonnes per hectare (MT/ha) and of course the more the merrier.
The higher the FFB yield, the more fruits you get per area which is also directly correlated with underlying profits. A point to note for an apple-to-apple comparison would be that the FFB is dependent on the age profile of the trees.
A rough guide of FFB to be expected based on age profiles is as follows:
3) Age of trees:
Lastly would be the age of the trees as we touched on earlier. A typical tree has an economic lifespan of approximately 25 years before it has to be replanted. The peak production would be within the range of 10→16 years old.
Once a tree has arrived at the 20 mark, its best days can be said to be in the rear-view mirror. Among Singapore listed CPO companies of a significant area, Bumitama Agri had the youngest age profile at approximately 5→6 years with their best days ahead of them.
Value In Action
From the above 3 factors, one should be able to filter the better performing CPO companies from those at the bottom of the pile. Although by themselves these factors aren’t a catch-all, they should serve as a starting point for investors interested in CPO operations.
We have to take note that these 3 factors would have more of an impact for entities primarily involved in upstream operations. We have to be cognizant of other factors at play when considering companies like Sime Darby which are conglomerates with CPO only a portion of their operations!
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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.