Should You Invest In United Plantations Bhd?

Does money grow on trees?

If you are a Malaysian or an Indonesian, you may have the tendency to believe that it does. To me, the answer is more evocative recently as I drove to Melaka for a short holiday on the North-South Expressway (NSE). For most parts of the journey, I see nothing else but … Oil Palm Trees.

In Malaysia, palm oil is practically the nation’s money-printing machine, a cash cow so valuable that the entire industry is worth hundreds of billions in Ringgit today. Awesome, isn’t it? Not quite … unless I know how an ‘true urbanite’ like myself can have some skin in the game and profit from palm oil without having the expertise of managing a palm oil estate.

The fastest and most direct answer I can think of is … Invest in shares of a well managed Plantation stock.

In this article, I’ll share my findings on United Plantations Bhd (UP), an industry veteran and now among the largest plantation groups in Malaysia with market capitalization of RM 5.57 billion. Hence, here are 5 things about UP you should know before investing in it.

#1: Plantation Assets

2017 Key Statistics:

Palm Oil Estate Size – 43,646 hectares

Matured Palm Oil Estate Size – 38,419 hectares (88%)

As at 31 December 2017, UP has 43,646 hectares of palm oil estates located in Malaysia and Indonesia. From which, 38,419 hectares (88%) of the estates had reached maturity, hence, contributing stable fruit production to UP. The other 5,227 hectares (12%) of the estates are immature and would start to bear fruit progressively over the next 2 – 3 years.

#2: Production

2017 Key Statistics:

Total Crude Palm Oil (CPO) Production – 205,519 metric tonnes (MT)

Total Palm Kernel (PK) Production – 43,760 metric tonnes (MT)

UP has produced, on average, a little more than 190,000 MT and 40,000 MT of CPO and PK over the last 5 years. Production figures did not grow substantially as UP did not increase the size of its plantation estates during the period.

 

Source: Annual Report

#3: Financial Results

2017 Key Statistics:

Revenue – RM 1.47 billion

Shareholders’ Earnings – RM 390.5 million

Return on Equity (ROE) – 15.62%

For the last 5 years, UP has achieved growth in both revenue and shareholders’ earnings. Revenue had grown from RM 950.2 million in 2013 to RM 1.47 billion in 2017. This has led UP to report higher shareholders’ earnings from RM 251.8 million in 2013 to RM 390.5 million in 2017.

UP has a 5-Year ROE average of 13.44%. It means, it has made, on average, RM 13.44 in annual earnings from every RM 100 in shareholders’ equity from 2013 to 2017.

Source: Annual Report

As at 30 June 2018, UP has reported zero in long-term borrowings, has current ratio of 9.18, and cash balance of RM 182.4 million. From a closer view, UP has RM 544.4 million in short-term funds, primarily in income trust funds that have yielded UP 3.26% a year in 2017. These funds are as good as cash as they could be converted in cash without any significant changes in value.

Thus, UP’s balance sheet remains solid as I write.

#4: Growth Potential

Key Statistics:

Acquisition Cost – RM 413.6 million

Plantation Size – 3,642 hectares

CPO Production – 40,527 MT (2017)

PK Production – 7,663 MT (2017)

As at 21 September 2018, UP announced its proposal to acquire 3,642 hectares of agricultural land from three different vendors situated in Perak for RM 413.6 million. UP intends to finance this acquisition solely through internal funds. The lands are mostly developed into palm oil estates where 87.6%, 0.9% and 11.5% of these estates are matured, immature, and undeveloped presently.

Upon completion, UP would increase size of its total plantation estate by 8 – 9% to 47,288 hectares. The management intends to make improvements on estate upkeep and maintenance practises to enhance yields from existing trees, speed up replanting activities with UP’s in-house high-yielding planting materials, and upgrade its infrastructure with intention of obtaining both the RSPO and MSPO certifications.

RSPO: Roundtable on Sustainable Palm Oil

MSPO: Malaysian Sustainable Palm Oil

#5: Valuation

Key Statistics:

Current Stock Price – RM 26.80 (24 October 2018)

Current P/E Ratio – 14.18

Current P/B Ratio – 2.27

Current Dividend Yield – 5.60%

As I write, UP’s stock price is trading at RM 26.80 a share. In 2017, its earnings per share (EPS) is RM 1.89, hence, its current P/E Ratio is 14.18, slightly below its 10-Year P/E Ratio average of 14.59 and the lowest since 2013.

At at 30 June 2018, UP has reported net assets a share of RM 11.81. Hence, its current P/B Ratio is 2.27, slight above its 10-Year P/B Ratio average of 2.16 but it is the lowest since 2012.

In 2017, UP has paid out RM 1.50 in dividends per share (DPS). If UP is able to maintain its DPS at RM 1.50, its dividend yield is 5.60% per annum, above UP’s 10-Year Dividend Yield average of 4.05% currently.

VIA’s Verdict

Overall, UP has delivered sustainable returns to its shareholders, both in terms of capital growth and dividend yields, for the past 5 years. It is an amazing feat as UP is subjected to fluctuations in the global prices of palm oil products.

Source: Google Finance

The question now is, ‘Should I buy shares of United Plantations Bhd?’

Like always, I can’t answer that for you. But, let me give you some pointers as a helpful guide to making a decision:

1. Are you positive about the Future Prospects of the palm oil industry for the long-term?  
2. Do you like the present Growth Plans discussed by UP?   
3. Is a Dividend Yield of 5.60% attractive to you?  
4. How long do you intend to keep shares of United Plantations Bhd?  
5. Do you plan to invest more shares of United Plantations Bhd if its stock price drops in the future?

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