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Crude Palm Oil
Crude Palm Oil
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.
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.
Golden Agri
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
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!
471100
241048
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.
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
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)
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.
20000
15000
10000
6739.95
5000
3485.02
2118.39
1232.964
Bumi
First
Golden
Indofood
Wilmar
Now that we know who is the biggest, lets find out who makes the most
money.
40000
Golden
30000
Wilmar
20000
First
10000
Indofood
0
2009
2010
2011
2012
2013
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!
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 $$ might be
stuck in receivables and doesnt translate to real cash on hand. As all of
us know, cash is king. All the more so for companies! Firstly, net cash
from operations is the actual cash they receive. For plantations, there
are 2 kinds of Capital Expenditure (Capex). Plant property and
equipment (PPE) and biological. We will take these 2 into account. The
Free cash flow(FCF) is derived by taking the net cash minus both the
capex. We will do it company by company.
Bumitama
160
140
120
100
Cash
80
60
Capex (PPE)
36.54612115
40
Capex (Bio)
20
FCF
-11.23825717
0
-20
2011
2012
-40.79946865
2013
-40
-60
Golden Agri
1000
800
600
400
Cash
200
Capex (PPE)
Capex (Bio)
0
-200
2009
2010
2011
2012
2013
FCF
-400
-600
-800
For golden agri, the cash has taken a downward plunge. For us, we
must determine if its a temporary plunge, or a long term plunge. For me,
it think it will take some time before it will come back up. This is due to
the age of the trees, older trees, past prime, lesser fruits, thus lower
cash. However, PPE capex seems to be growing year on year. Thats
not a pretty sight too. This leads to the FCF graph we see. Deep into
negative territory!
Wilmar
3000
2000
1000
Cash
0
2009
-1000
-2000
2010
2011
2012
2013
Capex (PPE)
Capex (Bio)
FCF
-3000
-4000
-5000
Wilmars graph looks like a roller coaster as well. in 2009 and 2010, the
company faced some problem. They suddenly had a surge of inventory.
They harvested and had no one to sell to. Thus resulting in lousy cash
results. However, the PPE capex seems to be more gradual than golden
agri. Means that they dont have to re-invest so much $$, 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
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
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
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 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.
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!