HOW TO INVEST IN THE PALM OIL INDUSTRY
Following on from first part of this series which you can click here to see part two will start to discuss a number of palm oil stocks.
Palm plantations stocks and their holding companies trade on stock markets in New York, London, Singapore, Malaysia and Indonesia. There are a number of conglomerates including companies such as Jardine Matheson (JMHLY:OTCBB), Archer Daniels Midland (ADM:NYSE), Bunge (BG:NYSE) and the Paris listed Bollore Group (BOL:PA) all have palm oil operations,but are a small part of their overall businesses.
Two of the largest listed palm oil producers are Singapore listed Gold Agri-Resources (GAGR:SI), who have one of the largest land banks of 600,000 hectares. Wilmar (WILI:SI), a more diversified agri-business is ranked amongst the largest listed companies by market capitalisation on the Singapore Exchange. WILI has major operations in Indonesia and has been undergoing and buy an build strategy of small holding plantations over the past five years. WILI currently trades just under book value on 13 times earnings with a P/S ratio of 0.35 and could well merit further investigation.
Looking more closely at listed palm oil companies in Indonesia, Astra Agro Lestari Terbuka (AALI:JKT) holds roughly the same land bank as WILI but trades at twice the book value and nearly 15 times earnings with a P/S ratio of 3.2. Other Indonesian listed companies include Bakrie Group which has diversified interests across various industries including mining, oil and gas, property development, infrastructure, plantations, media and telecommunications. The group is one of the largest business groups in Indonesia, with 10 companies listed on the exchange. Musim Mas and Triputra Agro Persada are large vertically integrated, family run conglomerates and Kallista Alam has a Director who has been imprisoned for illegally clearing a forest.
LONSUM (LSIP:MK)
Perusahaan Perkebunan London Sumatra Indonesia Tbk PT (LSIP:IJ) also known as London Sumatra Indonesia, or even better, Lonsum is an Indonesian plantation company focused on the production of palm oil, rubber, tea and cocoa.
Following on from first part of this series which you can click here to see part two will start to discuss a number of palm oil stocks.
Palm plantations stocks and their holding companies trade on stock markets in New York, London, Singapore, Malaysia and Indonesia. There are a number of conglomerates including companies such as Jardine Matheson (JMHLY:OTCBB), Archer Daniels Midland (ADM:NYSE), Bunge (BG:NYSE) and the Paris listed Bollore Group (BOL:PA) all have palm oil operations,but are a small part of their overall businesses.
Two of the largest listed palm oil producers are Singapore listed Gold Agri-Resources (GAGR:SI), who have one of the largest land banks of 600,000 hectares. Wilmar (WILI:SI), a more diversified agri-business is ranked amongst the largest listed companies by market capitalisation on the Singapore Exchange. WILI has major operations in Indonesia and has been undergoing and buy an build strategy of small holding plantations over the past five years. WILI currently trades just under book value on 13 times earnings with a P/S ratio of 0.35 and could well merit further investigation.
Looking more closely at listed palm oil companies in Indonesia, Astra Agro Lestari Terbuka (AALI:JKT) holds roughly the same land bank as WILI but trades at twice the book value and nearly 15 times earnings with a P/S ratio of 3.2. Other Indonesian listed companies include Bakrie Group which has diversified interests across various industries including mining, oil and gas, property development, infrastructure, plantations, media and telecommunications. The group is one of the largest business groups in Indonesia, with 10 companies listed on the exchange. Musim Mas and Triputra Agro Persada are large vertically integrated, family run conglomerates and Kallista Alam has a Director who has been imprisoned for illegally clearing a forest.
LONSUM (LSIP:MK)
Perusahaan Perkebunan London Sumatra Indonesia Tbk PT (LSIP:IJ) also known as London Sumatra Indonesia, or even better, Lonsum is an Indonesian plantation company focused on the production of palm oil, rubber, tea and cocoa.
Lonsum was listed in 1996 and is one of the oldest Indonesian plantation companies, is controlled by the Salim Group, one of the country's leading conglomerates.Palm products accounted for around 85 percent of the company's sales volume in 2013 with 85 and 90 percent of total production is sold on the domestic market, the remainder exported. Lonsum has a total of 89,845 hectares of oil palm plantations across its plantation estates and operates 11 palm oil mills in North Sumatra, South Sumatra and East Kalimantan.
In 1994 Harrisons & Crosfield sold its entire interest in Lonsum to PT Pan London Sumatra Plantation (PPLS), which took Lonsum public by listing its shares on the Jakarta and Surabaya stock exchanges in 1996. In October 2007, Indofood Agri Resources Ltd (IndoAgri), the agribusiness arm of PT Indofood Sukses Makmur Tbk, became the company’s majority shareholder through its Indonesian subsidiary, PT Salim Ivomas Pratama Tbk (SIMP). In December 2010, IndoAgri divested an 8% interest in Lonsum, of which 3.1% was sold to SIMP. This divestment increased the public float from 35.6% to 40.5%.
Lonsum is a low cost producer in the industry. The increase in global demand for palm oil has caused a structural shift in the intrinsic profitability for the industry’s low cost producers as the marginal cost of production has increased. The company has expanded production of crude palm oil by 4% p.a. since 2005. The company has a long history of profitability as illustrated below:
In 1994 Harrisons & Crosfield sold its entire interest in Lonsum to PT Pan London Sumatra Plantation (PPLS), which took Lonsum public by listing its shares on the Jakarta and Surabaya stock exchanges in 1996. In October 2007, Indofood Agri Resources Ltd (IndoAgri), the agribusiness arm of PT Indofood Sukses Makmur Tbk, became the company’s majority shareholder through its Indonesian subsidiary, PT Salim Ivomas Pratama Tbk (SIMP). In December 2010, IndoAgri divested an 8% interest in Lonsum, of which 3.1% was sold to SIMP. This divestment increased the public float from 35.6% to 40.5%.
Lonsum is a low cost producer in the industry. The increase in global demand for palm oil has caused a structural shift in the intrinsic profitability for the industry’s low cost producers as the marginal cost of production has increased. The company has expanded production of crude palm oil by 4% p.a. since 2005. The company has a long history of profitability as illustrated below:
The company has a ‘clean’ balance sheet with no financial debt and cash & cash equivalents of IDR 1.8T. To understand the true ‘owners earnings’ being generated by the business it is important to analyse the accounting for the amortisation of the company’s plantations. Estimates suggest that it requires capital expenditure of US$8,000 per hectare to establish new plantation area. The company’s mature palm oil plantation area is 74, 268 hectares and the productive lifespan of a palm tree is 25 years. Approximate calculations then suggests that amortisation charge should be closer to IDR 250Bn (roughly the figure the company capitalises in plantation development costs) given that on average 1/25th of the mature plantation needs to be replanted every year which equates to 3,000ha at US$8,000 per ha.The age profile of Lonsum’s plantations, with 30% of plantations under seven years old and yet to reach peak yielding age, should help to maintain future production volumes in the region of current volumes of 400,000 tons p.a. of crude palm oil. Analyst expectations suggest profits will increase in the coming years:
Disclosure: No position in LSIP