Crude Palm Oil (CPO)

Things to note before reading this.

1. This is not a professionally done research paper, just an attempt
by eQ..
2. I did this to the best of my limited knowledge! Please forgive me if I
get stuff wrong.
3. eQ is an engineer by training, no certified financial crap what-soever. So please dont believe everything I say. Maybe give a 50%
discount?
4. Any gains or losses made by you, if u in any madness try to use
this to buy shares, is all by your own MERIT or DE-MERIT!!
5. Last but not least, eQ is not liable for any damages done to your
portfolio or ego!

Background
Crude palm oil is used in our day to day lives. From cooking, to soap, to
biodiesel. Therefore, at this point in our lives, unless technology
improves, CPO will be here to stay. CPO consumption has increased
almost 6-8% yearly on average. Right now CPO prices are at the low
point due to oversupply from Msia and Indo, the 2 biggest producers of
CPO. However, whatever goes down, will come up? Eventually? At least
thats what I think. Below is the 5 year chart of CPO prices.

Some macro stuff

2 main players in SEA that grow CPO. Msia and Indo. Both have seen
some political changes. I think the Indo change will be more drastic and
have more upside. However I dunno if it will affect the earning
capabilities of the companies that are there.
India is now the biggest consumer and importer. Recently PM modi won,
so india economy also will get boosted? (As I type this. I realise all the

neighbour all predict boost. Only SG nv boost leh. =.=) However India is
price sensitive, mostly lower income people using CPO. A hike that is
too fast and too steep will lead to people using the bare minimum of
CPO and switch to cheaper alternatives instead?
China, is the second largest importer of CPO. This is due to, you
guessed it. CPO being cheap. Because we Chinese are cheap people.
:D People tend to stick with CPO there because its cheap and readily
available. 16% of CPO sent to china is used to make soap and 6% is
used for oleo-chemical production.
So as these 2 big countries grow, I think and CPO consumption will
increase even more. However, if CPO prices rebound too fast and too
high, people will jump ship to soya bean or olive.

Micro stuff! (eQ loves this)

Yay were done with the macro stuff! Lets get to stuff that matters, the
companies listed in SG. I looked into 7 companies listed on SGX, Nobel,
Olam, First resources, Indofood agri, Wilmar, Bumitama and GoldenAgri.
Out of these 7, I threw away 2. Olam and Nobel. Lemme share with u all
the reason. Olam is a company thats god-damn confusing. I dunno how
to analyse. Recently it was involved with a Muddy waters incident. And
I took a look at the company financials and totally dont uds how its
making money. Every year got release bond one. If u like bonds, just go
ahead and look at them. They recently released a bond paying 6.75% in
5 years. But our friendly govt is involved. Temasek is 20%
shareholder of Olam. So if u all trust in Temasek, please follow!
Nobel on the other hand is a really good company making significant $$.
However, it trades the CPO and oilseeds, doesnt really grow it. So wont
be fair to compare it with the 5 other grower and planters. We can look
at nobel another day when we are free!
Okay so this narrows it down to Wilmar, Bumitama, first resources,
Indofood agri and Golden-Agri. Let us take a closer look at them.

Golden Agri

World second largest plantation. In terms of planted area. Only Sime

darby is bigger. Started in 1996, listed in SGX on 1999. GAR has
capabilities to cultivate, extract and refine CPO in Indo. In china, even
has deep water ports for transportation and storage and crushing of
oilseeds! In terms of value chain, quite well integrated, from upstream to
downstream.

Bumitama Agri

Small, young and fast grower, well poised for the future. Ill explain why
later. Started in 1996 as well, started production at 2003, listed on SGX
2012. Core business is just growing, crushing and extraction. No refining
capabilities. So this is still a purely upstream business.

Wilmar

Started in 1991 as Palm oil trader, now grows palm oil and sugar, also
involved in grains processing(sunflower, rapeseed and soybean), sells
its own edible oils in china.
Super integrated value chain. Owns about everything it uses, thus able
to control prices. From plantation to mills to refinery and shipping. Even
has its own fertilizer plant to produce fertilizer for its plantations. Biggest

refinery capability of them all, 37000000 Million tonnes per

annum(MTPA).
First Resources

Started in 1992, operates plantation and 12 palm oil mills capable of

4050000 MTPA. Has 2 refineries capable of 850000 MTPA. More of a
upstream producer with limited downstream capabilities.

Indofood agri

Plants and grows just about anything! Rubber, Oil palm, sugar and other
stuff. Considered a diversified plantation? But bulk of plantation is still
CPO cause it makes the most money. 21 palm oil mills capable of
810000 MTPA

For those that are interested, here is the value chain of how stuff works
in the CPO industry.

Bumitatma has only upstream capabilies. While both golden and wilmar
have integrated the whole chain into their business.

Okay. So we are done with the introduction here! Lets get down to the
comparisons. Both wilmar and golden have oilseed refining capabilities
in china and sell edible oil in china. Indofood agri has rubber and sugar
also. We will get into that later. Lets just compare the CPO stuff for now!

Total planted area (Graph A)

500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0

471100

241048

Total planted area

170596

149683

Bumi

239921

Golden

Wilmar

First

Indofood

In terms of total planted area, Golden agri is leading, of course la. World
2nd largest leh! Both Bumitama and First looks small as compared to
golden agri. But small also good. Easier to control and plan!

One important thing that I totally forgot to mention just now. Age of the
trees is very impt in plantations. Too young, lousy, too old also lousy.
Palm oil trees are like humans la. They like to be just nice.
So trees that are aged 7 and below, too young. Trees aged 18 and
above, a lil old. Trees above 25 will get cut down and made into fertilizer
cuz its not productive to keep them anymore. Thus the most impt age is
7 to 18!

Graph B shows the % distribution of trees. Can see that 3/5 of the
companies have the bulk of its trees in the prime range. Thats normal
cuz its the age that makes money! Whats impt is the young trees <7.
These are the ones that will ensure a continual and sustained growth of
the company. We dont want a company where 80% of the trees are
prime. Then 2-5 years later, all become too old. All must cut down. Then

profits would drop 80%?!! Thus companies have a way to plan their
planting such that there will always be a scenario.
Remember when I said Bumitama was well poised for the future? Look
at the percentage of young trees, close to 70%. When these trees
transition into the mature stage, it will increase the production and thus
lead to profits increase!! First resources is also very close to that profile.
Lots of young trees. I would say wilmar is the average one. Approx. 50%
mature, 25% on either the young or old side. Still looks okay to me.
Golden agri on the other hand doesnt look like they have enough young
trees growing. Might have a lil problem sustaining for the long run. Only
17% is young. Out of the 5, Indofood looks most diversified. 3 category
roughly similar. Wont have explosive growth but should be able to
sustain.

Age of planted tree (%) (Graph B)

80.0

69.4
58.8

56.0

60.0

47.4

40.0

30.6
17.0

20.0

27.0 24.0

33.2

41.6
35.4
23.1

20.0

Young <7
Prime 7-18
Old >18

8.0
0.0

0.0
Bumi

Golden

Wilmar

First

Indofood

Age of trees (ha) Graph C

250000

223438

200000
150000

127361

134986.88

103880.002

100298

100000
50000

99710
84827

79912
57851.52
48209.6

45802.998

56678

55384

13620

0
0
Bumi

Golden

Wilmar

First

Indofood

Looking at graph C, we can see that golden has more young trees even
thou it is a lower %. This is due to the sheer size of the plantation. So a
small % will relate to a huge number. The amount of old trees that
golden has is also staggering. Much more than any other. This is a point

we must take note. Old trees will result in lower and lower fruits
produced. Thus will cause profits to take a hit.

If I was to hazard a guess using PURELY planted area, I would say that
wilmar and Indofood would be the stable stalwarts. Bumi and First
resource are the fast growers that will come online with a boom. Golden
looks to be strong now. But I dont really see it lasting the test of time if
they dont do something to the age group.

Next, let us take a look at the productivity of the planted area. No point
having a super duper large planted area if the crop is lousy and u get
lousy yield. So Productivity is one of the core things people look at as
well. This variance in productivity is due to many factors, the seed used
to grow. Diff companies have diff seeds. Some are better while some are
not so good. Fertilizer used, land its planted on, weather? All these
affect the productivity.
Table of productivity (Such a nice name)

Bumitama
Golden
Wilmar
First
Indofood

FFB/Mature Hectare
(tonnes per Ha)
17.4
20.8
18.8
18.7
16.35

CPO extraction
(%)
23.3
22.62
20.4
23.1
21.53

PKO extraction
(%)
4.5
5.17
4.7
5.3

Fresh Fruit Bunch (FFB) is the actual fruit that is plucked from the tree
once its ripe. So the more fruits there are, the better the trees! This is in
tonnes per Ha. Thus golden agri has the best trees, returning 20800 kg
of FFB per hectare of land. Meanwhile Indofood has only 16350 kg per
hectare. Thats a difference of 4450 kg! u multiply that by the amount of
hectares they have, it comes up to a staggering amount!
The same factors affect CPO extraction rate as the FFB. However,
technology in the mills also play a part. Better tech means we can get
more out of what we have. Bumitama is the highest, wilmar is the lowest.
Again this few percentage points can mean a lot when multiplied by the
hectares.

CPO is crude palm oil we get from the fruits, palm kernel oil (PKO) is the
oil we get from the kernel of the fruit. Thats right. The husk that protects
the fruit also contains oil. So basically we can use everything that we
harvest from the trees! Again higher numbers are better! Lets give some
rankings to the 5 companies. 5 being the best, 1 being the lousiest.

Bumitama
Golden
Wilmar
First
Indofood

FFB/Mature Hectare
(tonnes per Ha)
17.4
(2)
20.8
(5)
18.8
(4)
18.7
(3)
16.35
(1)

CPO extraction
(%)
23.3
(5)
22.62
(3)
20.4
(1)
23.1
(4)
21.53
(2)

PKO extraction
(%)
4.5
(2)
5.17
(4)
4.7
(3)
5.3
(5)
(1)

The scores are as follows,

Golden Agri
First Resource
Bumitama
Wilmar
Indofood

12
12
9
8
4

From here we can see that even though Golden Agri and First Resource
are the most productive as a whole, they have different ways of doing it.
Golden Agri has the most FFB but lower CPO% whereas First
Resources doesnt have so much FFB, but the CPO % yield is better.
Bumitama in the middle with its high extraction rate. Indofood is bringing
up the rear with almost last in everything.

Now that we are done with the trees, let us move on to the numbers!
Firstly let us check out the market cap of the companies. To see which is
the big shark and which is the small fish. We do this by multiplying the
no. of shares and the share price.

Market Cap (In Millions) Graph G

25000
20412.81

20000

15000

10000
6739.95
5000

3485.02
2118.39

1232.964

Bumi

First

Golden

Indofood

Wilmar

The number you see, is in millions. So yeah. Wilmar is a company with

20.4 BILLION dollar market cap. All the plantations are billion dollar
companies. No doubt they are big. But the biggest is still Wilmar. Due to
its value chain, it commands a big market. Indofood is the smallest here,
barely staying alive next to the big boys. Despite being barely alive, its
still a billion dollar company!

Now that we know who is the biggest, lets find out who makes the most
money.

5 year Revenue (Graph D)

60000
50000
Bumi

40000

Golden
30000

Wilmar

20000

First

10000

Indofood

0
2009

2010

2011

2012

2013

5 year NPAT (Graph E)

2500
2000
Bumi
1500

Golden
Wilmar

1000

First
Indofood

500
0

2009

2010

2011

2012

2013

From graph D, its seen that wilmar has the largest revenue. The others
look like a straight line beside it. Only Golden Agri can be seen as
compared to the large revenue of Wilmar. However, if we look at Graph
E, the Net profits after Tax, its a different story.
Wilmar is actually quite near to the rest. In 2010, Golden Agri even
peaked wilmar by a lil. However both wilmar and Golden Agris graphs
look crappy. I would prefer First Resources graph instead. From 2009 till
2013, a steady increase. Not often that we can find such a steady net
profit after tax!

Then lets look at the net margins in % as shown in Graph F.

Net profit Margins (Graph F)
60
50
Bumi

40

Golden
30

Wilmar
First

20

Indofood
10
0
2009

2010

2011

2012

2013

Even thou we saw the First Resources had increasing Net profit after
tax, its margins were actually slowly eroded. This was due to probably

the CPO price downturn. As we can see that it wasnt the only company
hit. All 5 of them saw significant erosion in net profit margins. In this
graph, you can see why there was such a big difference in the Revenue
and Profits of Wilmar. Because the margins were super low, all below
4.5% after year 2010.

Next let us look at Cash statements. I like companies that have CASH
coming in. Even if they book a lot of revenue and profits, the $$ might be
stuck in receivables and doesnt translate to real cash on hand. As all of
us know, cash is king. All the more so for companies! Firstly, net cash
from operations is the actual cash they receive. For plantations, there
are 2 kinds of Capital Expenditure (Capex). Plant property and
equipment (PPE) and biological. We will take these 2 into account. The
Free cash flow(FCF) is derived by taking the net cash minus both the
capex. We will do it company by company.
Bumitama
160
140
120
100
Cash

80
60

Capex (PPE)

36.54612115

40

Capex (Bio)

20

FCF
-11.23825717

0
-20

2011

2012
-40.79946865

2013

-40
-60

Bumitama is a recently listed company, I didnt go into the prospectus to

look into the previous years. But for the past 2 years, the FCF is still
negative. Personally I dislike negative FCF companies. The Cpaex for
PPE also seems to be rising. Thats a factor we should always look at. It
shows how much money the company needs to re-invest, or put back
into the business to make it work.

Golden Agri
1000
800
600
400

Cash

200

Capex (PPE)
Capex (Bio)

0
-200

2009

2010

2011

2012

2013

FCF

-400
-600
-800

For golden agri, the cash has taken a downward plunge. For us, we
must determine if its a temporary plunge, or a long term plunge. For me,
it think it will take some time before it will come back up. This is due to
the age of the trees, older trees, past prime, lesser fruits, thus lower
cash. However, PPE capex seems to be growing year on year. Thats
not a pretty sight too. This leads to the FCF graph we see. Deep into
negative territory!
Wilmar
3000
2000

1000
Cash

0
2009
-1000

-2000

2010

2011

2012

2013

Capex (PPE)
Capex (Bio)
FCF

-3000
-4000

-5000

Wilmars graph looks like a roller coaster as well. in 2009 and 2010, the
company faced some problem. They suddenly had a surge of inventory.
They harvested and had no one to sell to. Thus resulting in lousy cash
results. However, the PPE capex seems to be more gradual than golden
agri. Means that they dont have to re-invest so much $$, can have more

cash to do other stuff. However, the FCF is still fluctuating. I think they
have more room to improve.
First Resources
300
250
200
Cash
150

Capex (PPE)

100

Capex (Bio)
FCF

50
0
2009

2010

2011

2012

2013

-50

The prettiest graph of them all, first resources has the nicest numbers in
the cash statement. Cash is growing year on year, PPE capex came
down in 2012 and 2013, however, Bio capex is growing at a pretty fast
pace. We dont usually see this in other companies. I believe this is due
to the company buying seeds and planting lots of young trees as shown
in graph C. The FCF of first resources is the best! Positive for 4 years
and holding steady for 2011, 2012 and 2013. Hopefully when they start
to control capex, it will lead to high FCF, and resulting in higher cash on
hand.
IndoFood
350
300
250
200
150

Cash

100

Capex (PPE)

50

Capex (Bio)

-50

FCF
2009

2010

2011

2012

2013

-100
-150
-200

Last but not least, Indofood. The company had 1 good year in 2011.
Where cash was high and capex was low! However, for the rest, it was

the opposite. This results in FCF that are very negative. Looks pretty
scary to me.

This concludes the Cash from operations and Capex points. From here,
we can see that First Resources has the best financials, I would say that
wilmar is the 2nd, bumitama would be third, with golden agri and Indofood
bringing up the rear.

Now lets move on to cash and debt! Very simple again! High cash = .
High debt = ! For plantations, I took inventory into
consideration as cash equivalent. This is due to the raw products such
as FFB being easily sold for cash! Again we shall do this company by
company because wilmars numbers always screw up my graphs. Too
large make the graph skewed and hard to analyse. Net position is
obtained by cash + inventory debt. For debt, I factored in short term,
long term and even debt due to bonds.

Bumitama
500.0

440.3

400.0
300.0

274.4

245.6

200.0
100.0

Cash

94.2

51.2 40.3

34.4

28.7 28.0

Inventory
Debt

0.0
-100.0
-200.0

2011

2012

-188.9

2013

Net position

-145.8

-300.0
-400.0

-348.8

Bumitama, fluctuating cash, increasing inventory, which isnt really a

good thing. Means you have a lot of products, little people to buy them.
The debt is increasing as well! resulting in a negative net position. We
will soon realise all plantation companies are fuelled by debt.

Golden Agri
4000.0
3223.8
3000.0

2316.3

2000.0
1000.0

853.8
525.0
360.0
31.3

1230.0
768.8
272.5

1356.3
938.8
346.3

1050.0
698.8

Cash

965.0
408.8

Inventory
Debt

0.0
2009
-1000.0

2010-188.8

2011 -71.3

2012

2013

Net position

-567.5

-2000.0

-1850.0

-3000.0

Again, cash is fluctuating, inventory is increasing year on year. Only

dipping in 2013. I would say retty good net position from 2009 to 2012.
Debt gradually increasing from 2009 to 2012. Shooting up in 2013. That
was due to a bond issuance during Oct 2012. These bonds have a 2.5%
interest that can convert to shares at a pre-defined price. I factored this
into debt as well. Furthermore, these bonds have a chance to dilute
shareholdings as they can be converted.
Wilmar
40000.0

32742.5
27806.3

26110.0

30000.0
21781.3
20000.0
11975.0
10000.0

4923.8
1027.5

8421.3

9081.3

9025.0

Debt

0.0
-10000.0
-20000.0

2009
-6023.8

Cash
Inventory

3000.0

1976.3

1720.0

1115.0

8921.3

2010
-12245.0

2011

-15308.8

2012

2013

-16908.8
-20717.5

-30000.0

Wilmar has debt increasing year on year as well, cash is also increasing
year on year. Which is good. But it didnt increase as much as debt. In
2010, inventories spiked by around 40%. Then it stayed there ever
since. Pretty stable inventory as of now. Nowever the net debt of 20
Billion would raise a few eyebrows.

Net position

First Resources
800.0

672.5

600.0
378.8

355.0

400.0

490.0

Cash

298.8

262.5

261.3

225.0

436.3

611.3

Inventory

200.0

73.8

72.5

48.8

22.5

18.8

Debt
Net position

0.0
2009

2010
-95.0

-111.3

-200.0

2011

2012

2013
-110.0

-125.0

-238.8
-400.0

First resources has the highest cash to debt ratio around. Can be seen
by the blue bar, being closest to the grey bar. Cash is reasonably stable,
debt is gradually increasing, and inventory is also increasing year on
year. I would frown upon the inventory increase year on year. This
means that they pay $ to grow and harvest, and it sits in the warehouse,
doesnt get sold or translated to cash. Probably can do better about it.
The have bonds due in 2017 and 2020 as well. So debts need to be paid
off during that year.
Indofood
1200.0

800.0

934.6

902.6

1000.0
739.6

694.5

771.6

720.5
540.1

600.0

Cash

404.1

403.4

400.0
200.0

191.5
115.0

178.3

140.4

Inventory

200.7
101.2

166.7

Debt

20.3

Net position

0.0
-200.0

2009

2010

-400.0

-600.0

-433.0

2011

-358.8

2012

2013

-363.8

Indofood agri did really well in the 2011 and 2012 years. If we can remb,
the FCF in 2011 and 2012 was pretty good. Can be seen here as well.
However, the financials of Indofood agri are fluctuating and it makes us
hard to even try and predict a trend. They even have a 11.65% bond
thats privately held. Looks pretty weird to me.

Thats all for the financials part! Now lets take a look at the valuations!
Most exciting.
Well just look at Price to earnings and price to book ratios. Probably can
give us a sense of whats expensive and what is cheap!
P/E
Bumi
Golden
Wilmar
First
IndoFood

Rank
21.8
17.2
12.2
10.9
22.1

P/B
4
3
2
1
5

Rank
3.3
0.6
1.1
2.6
0.8

5
1
3
4
2

These figures are calculated as of 28/08/2014, P/E is calculated by market

cap as of today, divided by earnings attributed to shareholders reported
for 2013. P/B is is calculated by market cap divided by equity attributed to
shareholders. The lower the P/E and P/B, the better. Means were are
getting it for cheaper.
If I were to rank according to P/B ratio, we can see that golden agri looks
pretty cheap, with only 0.6 P/B. However, we must remember that its
heavily leveraged, with high debts.
Again, if I were to rank according to P/E, First resources looks to be the
cheapest! P/B is pretty high at 2.6. But Im not buying the company for
its land, Im buying it for its earning capabilities.

Conclusion Time!
Is sure some of u all didnt read and skipped straight to this part la!
Before I start any conclusion, I want to say again that this is just purely
my views, not a buy/sell or hold call. If u want those advice, please
head to a professional broker for such advice.
In terms of business model, I would prefer wilmars vertical integration. It
has everything under its own brand, even shipping. Its monopoly is also
un-rivalled in china. Close to 50% of consumer palm oil is sold by them
in 2013!

For the actual plantation, I would prefer bumitama or first resources.

Purely because of the age of trees. I want a company that has the ability
to grow in the future, instead of a has-been company. I believe
bumitama and first resources have the capabilities to grow due to the
age of the trees.

For having the best land, or best seed or best technology, First
resources and gold agri ties at first place. These 2 companies seem to
have found a way to extract more from the land they plant on, which is
good for investors!

If we look at the financials, the one company that consistently stood out
was first recourses. Strong margins, growing NPAT, wonderful free cash
flow and relatively conservative debt made this my choice again.

Lastly, looking at the valuations, First Resources again takes main stage
as it has the lowest P/E! With a P/E of 10.9, it even seems cheap to the
value investor! But we need to factor in debt and growth to find the true
intrinsic value.

So all in all, with First Resources coming up so often, it isnt difficult to

guess which company I prefer now? Im also a sucker for monopoly.
So when wilmar has an improvement in the financials, probably my
preference would sway?

Thanks for reading this and hope that it helped you understand more
about the CPO industry.

Last but not least, eQ is a diehard Fundamental Analysis guy. Might not
always be right, might not always get the cheapest or best deal, but I
believe I can last the longest! GOOD DAY EVERYONE!