Palmoil

[skanjete]

I know there are some investors here interested in commodities.

It surprises me a little to see that one of the most interesting sectors of the commodity sector gets barely any mentioning here (I mean North America) : the palmoil sector.

 

However, it's a sector that is well known in Indonesia and Malaysia and also in the UK, Belgium, France & Luxembourg, because of historical reasons (colonialism).

 

Why is it so interesting?

Well, as we know, to have a moat in a commodity business, you need to be the low cost producer. The producer with the lowest structural costs is the long term winner. And that's exactly what palmoil is.

 

Palmoil is a vegetable oil that competes with soyoil, rapeseed-oil, olive-oil, sunflower oil,... These vegetable oils are a necessary commodity and largely interchangeable and thus compete with each other for the world vegetable consumption.

 

The thing is that palmoil is way more efficient to produce than the other oils, because of the productivity of 1 hectare :

coconut : 0,35tons/ha

cottonseed oil : 0,15tons/ha

sunflower : 0,5ton/ha

rapeseed : 0,75ton/ha

soybean oil : 0,4ton/ha

palmoil : 4 ton/ha

So the productivity of 1 ha of palmoil produces 5x as much oil as a ha of rapeseed and 10x as much as a ha of soybeans.

Logically, it's way cheaper to produce a ton of palmoil than a ton of competing vegetable oil.

 

The consequence is that over the last several decades, palmoil has taken a larger and larger share of the world vegetable oil production/consumption to about 30% now.

The other consequence is of course that palmoil is about the most profitable crop to be produced. The world palmoil price is protected by the higher production costs of the other vegetable oils and so the palmoil crop is as good as always cash flow positive, even in the worst crisises.

 

Cash flow margins of 20-30% are no exeption. So palmoil production is definitely a "good business".

 

 

 

[skanjete]

there are other interesting aspects :

 

Whereas soy, corn or wheat are crops that have to be produced each and every year, starting from bare land, palmoil comes from a nut that grows on a tree.

 

The trees mature in about 8 years. The first crop is to be expected after 4 years, but full production comes after 8 years. This means that palmoil is by definition quite capital intensive and requires a major investment in the first year to buy the land, clear it, build infrastructure, plant the trees,... Thereafter, there are only maintenance costs which are in comparison very low for the rest of the trees life (25years).

 

The business model thus mirrors the toll-bridge model. One major investment, and thereafter 20 years of high margin cash flow. Inflation or currency effects thus only affect the original investment in the balance sheet, but the cash flows themselves are inflation protected. This means that the return on equity is indexed and inflation protected. Which coincidentally is exactly what Buffett describes as a good business.

 

[skanjete]

I just gave some sector background.

 

If there is any interest from the other board members, there are some interesting companies to be discussed in the sector.

[Radio Free Cash Flow]

Palm oil is an interesting and little known business, but unfortunately it has a reputation for being monstrously environmentally destructive, resulting in widespread deforestation. It also has a reputation for worker abuse. For these reasons, Kellogg just committed to switching to ethically-produced palm oil over the next few years. It will be interesting to see if this sparks a wider trend as consumers demand greater accountability from their food providers.

 

The most interesting company I know of that deals in palm oil production is Camellia (LON:CAM). Camellia also owns other assets like a private bank and a securities portfolio, and trades far below the value of its assets. However, I really doubt that management is at all interested in closing the gap.

[skanjete]

Palm oil is an interesting and little known business, but unfortunately it has a reputation for being monstrously environmentally destructive, resulting in widespread deforestation. It also has a reputation for worker abuse. For these reasons, Kellogg just committed to switching to ethically-produced palm oil over the next few years. It will be interesting to see if this sparks a wider trend as consumers demand greater accountability from their food providers.

 

The most interesting company I know of that deals in palm oil production is Camellia (LON:CAM). Camellia also owns other assets like a private bank and a securities portfolio, and trades far below the value of its assets. However, I really doubt that management is at all interested in closing the gap.

 

Camellia is indeed an interesting company, but has no palmoil activities. They do al kinds of other crops like tea mainly (India, Kenia, Malawi, Bangladesh), also pistachios and citrus in California, soya in Brazil, macadamia's in Malawi, grapefruit & timber in Kenia, wine in South Africa,... No palmoil.

 

You're correct that it's undervalued and that management isn't interested in closing the gap.

[skanjete]

Palm oil is an interesting and little known business, but unfortunately it has a reputation for being monstrously environmentally destructive, resulting in widespread deforestation. It also has a reputation for worker abuse. For these reasons, Kellogg just committed to switching to ethically-produced palm oil over the next few years. It will be interesting to see if this sparks a wider trend as consumers demand greater accountability from their food providers.

 

 

Monstrously environmentally destructive : that's indeed what some environmentalists try to make us believe. Also in Europe there is a politically inspired movement away from palmoil with the environment as argument. However I suspect the French have other considerations as well : they prefer to subsidize their rapeseed farmers instead of buying Indonesean or Malaysian palmoil.

Unless we all agree to stop using vegetable oil (which I doubt, even for the environmentalists), I think that palmoil is about the most green oil there available. For 1 ton of palmoil, you need 2500m² of farmland. If you stop using palmoil, but choose to use soy oil instead, you need for the same ton of oil 25.000m² of farmland, or 10 times as much land to deforest!

 

There is indeed a movement right now to produce green and ethical palmoil : RSPO palmoil. Unilever also signed a charter to only buy palmoil with such a label.

[Radio Free Cash Flow]

My mistake on Camellia. Thanks for the correction. I must have been thinking of Bollore Group and its holding in Socfin.

[jouni1]

well from reading the papers around here, i know finnish neste oil is one of the biggest refiners of this stuff. at least i think so. haven't been following too closely or done any analysis due to the government holding 50,1% of the stock.

 

i think they are using other renewable oils as well these days, as they were continuously attacked by greenpeace etc.

[Phaceliacapital]

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For an Asian agribusiness that spent its first two decades impressing western rivals Cargill and Archer Daniels Midland with breathtaking rates of growth, the past two years have been anything but smooth for Wilmar.

The Singapore-listed company, the world’s biggest producer of palm oil, a key ingredient in processed food, has seen its share price fall by 44 per cent, making it the worst performer in the Straits Times index and dragging its market capitalisation down to about US$17bn.

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By the numbers: Wilmar

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But there are signs that Wilmar could be on the mend, just as the fortunes of fellow Asian agribusiness, Singapore-listed Olam, are also starting to recover after the company’s bruising battle last year with US shortseller Muddy Waters.

Investors had fretted over the one thing that helped drive Wilmar’s growth for years: China.

Kuok Khoon Hong, Wilmar’s co-founder and a nephew of Robert Kuok, the billionaire Malaysian entrepreneur, pushed into the country in the 1990s, setting up soyabean processing plants. He was betting that the growth of China’s middle class would spur demand for protein-based foods such as meat, and hence demand for the soyabean meal fed to cattle and pigs.

That bet paid off handsomely for years, until an aggressive expansion by China’s state-owned processors caused overcapacity, squeezing soyabean margins.

Now, that business appears to be recovering as capacity growth has been “more disciplined” across the industry, Standard Chartered says. Earnings last week showed Wilmar’s oilseeds division posted its sixth consecutive quarter of profits, with pre-tax profit in the three months to December of $116m. That helped drive a 5 per cent rise in group net profit for the year to $1.32bn.

Shares in Wilmar were up 2.6 per cent at S$3.48 at midday on Tuesday.

The recovery in oilseeds was also reflected in the earnings of Noble Group, a rival Singapore-listed agribusiness, which on Friday highlighted “better crush margins in China”.

Mr Kuok remains bullish on China even though the pace of its economic growth has moderated. “Every time there is a bearish [research report] on China . . . our share price will drop. But in all our businesses we have volume and margin growth and we are becoming stronger against competitors. So maybe this slowdown is good for us,” he says.

Yet Wilmar’s recovery has as much to do with expansion beyond China. The company is pushing into palm oil and edible oils in Africa, where it made its first investment in 2007 and where lower mortality rates and greater spending power are creating a new consumer class, according to Mr Kuok.

Wilmar also has been muscling into sugar, a business long dominated by Cargill, ED & F Man, Sucres & Denrées and Dreyfus. It made its first acquisition in 2010, buying Australian sugar company Sucrogen.

Key Wilmar partner provides western link

 

Wilmar’s business empire may have its roots in Asia but its largest single shareholder after the Kuok family is firmly planted in the vast agricultural plains of the US Midwest: Archer Daniels Midland.

The US agribusiness has a 17 per cent stake and was a key partner for Wilmar as the two expanded in China in the 1990s. Speculation persists that they may eventually combine.

Continue reading

Last week, Wilmar entered India, the world’s second-largest sugar producer, with a $200m investment in a sugar joint venture with Shree Renuka. The Indian group also has 100,000 hectares of sugar cane in Brazil, the world’s largest sugar exporter, which Wilmar sees as complementary to its Indian investment.

Sugar now accounts for 7 per cent of group pre-tax profits, while oilseeds has shrunk to account for 13 per cent, from 26 per cent in 2009.

“If you aggregate all the operations excluding the China soyabean business they have been steadily increasing their profit contribution. And those businesses are generally higher-return businesses,” says Adrian Foulger, head of soft commodities research at Standard Chartered.

At the group level Wilmar has managed to boost net cash flow by 52 per cent year-on-year, after reining in capital expenditure. That fell to $1.4bn in 2013 from $1.7bn the previous year and this year should be “somewhere around $1bn”, says Ho Kiam Kong, chief financial officer.

Yet Wilmar cannot take all the credit. Some of its improved performance is due to structural changes beyond its control, as the moderating capacity in Chinese crushing shows, and shifts in market behaviour.

Ephrem Ravi, analyst at Barclays, says that while the sugar acquisitions have been “a milestone in terms of operational and geographical distribution”, the seasonality of the crop inevitably will mean earnings volatility.

In palm oil refining, which accounts for 48 per cent of group pre-tax profit, Wilmar is facing tougher competition from refiners in Indonesia adding capacity to take advantage of government tax incentives aimed at developing local industry. Wilmar’s refining margins shrank in the fourth quarter.

The company has managed to offset that partially by expanding into higher-margin areas such as oleochemicals and speciality fats.

However, Conrad Werner of Macquarie Securities warns: “We see [crude palm oil] margins as the more important fundamental driver for Wilmar and are cautious on them [amid] rising competition.”

[skanjete]

Groups like Wilmar indeed got big, starting with palmoil. But currently are no longer a pure palmoil play. There are a lot of other activities as mentioned in the article.

 

There is indeed a indirect China factor because Asians seem to prefer palmoil instead of other types of oils. China, India, Malaysia and Indonesia together already consume about 55% of total palmoil production. As their populations become more affluent, palmoil consumption is considered to grow, even as opposition grows in the EU (which consumes about 10%).

 

Now there are 2 important factors I see over the coming years which could have an impact on the palmoil market, one positive and one less positive.

Let's start with the less positive : about 10-15% of the vegetable oils is used for the production of biofuel. Personally I find it stupid and immoral to burn food in engines, but that's how it is. Once the environmentalists and politicians come to the same insight, or if the oil prices take a dive, the use and production of biofuel could lower, causing an oversupply of vegetable oils and palmoil.

 

Now the positives : in Malaysia and Indonesia (the major producers of palmoil) there is a strong vested interest in the palmoil sector and its refineries. With their biofuel policy, they can balance the palmoil market so that palmoil prices stay firm. Over the last two years there was a kind of oversupply of palmoil, so they passed regulation so that fuel now has to contain 10% biofuel. The oversupply got burned off immediately so to speak and palmoil prices stabilised.

 

Secondly, as I said, there was a kind of oversupply because of major expansion investments in the period 2002-2007, between the Asian crisis and the Lehman debacle. These trees grew into maturity over the last few years and are now producing at their maximum.

But since 2008, there was at first the financial crisis which impeded strong expansion and thereafter environmental regulation got a lot more restrictive. So expansion since 2008 has slowed a lot. Now that the trees from the previous expansion period are mature, production growth is expected to slow considerably from 2015 on.

 

The combination of these factors could lead to considerable higher palmoil prices in the future.

 

[skanjete]

And now a company suggestion.

Because of the specific business model, I prefer the pure palmoil producers, instead of the integrated groups or refineries.

 

A company I would suggest is Anglo Easten Plantations. It's a company with a long history listed in London, which owns palmoil plantations, principally in Indonesia. It's a family owned business (55% I think from the top of my head), the same family behing Genting by the way (cfr. biography "My Story" from Lim Goh Tong for more information).

They are also about the best operators in the industry.

So that's good : a very stable, well operated company in a great business.

 

But the best of all : the shares are cheap.

From whatever angle you look at it, they are cheap.

 

First : cash flow.

Over the last 5 years, they produced an average of about 92p a share of cash flow. These years contained some very good years, but also the last 2 years which were not so good.

The share price is about 675p at the moment and they have about 125p of net cash. So the E.V. is 550p a share. This gives a E.V./cash flow of about 6.

But, about 30% of their plantations consist of relatively young trees which are not mature yet. The investments have been made, but are not productive yet. These will start to produce over the coming years so that we can expect cash flow to grow by about 50%. Remember : this extra cash flow doesn't require any extra capital, so basically all cash flow can be considered as free cash flow! (cfr. the specific business model of palmoil plantations explained above). That reduces E.V./cash flow to about 4 in a few years, and the P/FCF to 5, or a free cash flow yield of 20%. And that with very low risk since they are in a net cash situation.

 

Second : from an asset basis.

They own about 60.000hectares. At their current E.V., this means that a hectare is valued at about 6.300US$/ha. If you know that these types of plantations are traded at about 15.000-20.000US$/ha, it's clear they are undervalued. And remember these are hectares that are very well operated and mostly in their prime life. So, if anything, they should deserve a premium instead of a discount. A hectare of mature palm can generate a free cash flow of about 1.250US/ha, so this explains something of the valuation.

 

The reason for the undervaluation in my view is the listing in London, where the company is less well followed or understood and where palmoil is diabolized in the press. If they would list in Indonesia or Malaysia, they would immediately be valued at the mentioned 15.000-20.000US$/ha.

 

So we've got a family controlled company, well operated, in a good business, with good prospects for the sector they operate in and with a very cheap share price. A nice combination, I'd say.

[Green King]

Skanjete Great post

 

How do you figure the supply situation ?

 

Just trying to learn how to do that type of fundamental analysis.

 

TIA

[yadayada]

Thoughts on Keck seng? I think these guys have quite a bit of palm oil plantations.

[skanjete]

Skanjete Great post

 

How do you figure the supply situation ?

 

Just trying to learn how to do that type of fundamental analysis.

 

TIA

 

Sorry, Green King, I only now saw your response.

 

About the supply situation. I've been following the sector and it's different companies for at least 10 years.

 

And if you list up the expansion investments all these companies did over the last 15 years, they all have some common things :

- first a period from 1998-2002 after the Asian crisis during which there were very few expansion investments. During this period, palmoil prices were relatively low and in combination with the bank sector problems at the time there was no money to invest in expansion.

- from 2003 on, palmoil prices started to firm, not coïncidentally 5-6 years after the period of under-investment. The plantations started to get higher cash flows, loans got refinanced and expansion planting started again.

- this continued until 2008, and with the crisis, expansion basically stopped in 2009. Things picked up a little bit again in 2010, but from then on, there was a lot more restrictive regulation because of environmental concerns. Companies didn't get no permits to expand and some farmland previously destined for palmoil such as peatland got there permits revoked. It's a lot thougher at the moment to expand plantations, even as the cash is available (consider Anglo Eastern with lots of net cash).

 

This thing is not company specific, but can be identified industry-wide.

 

So, as we know that a tree takes 5 years to start producing and 8 years to fully mature, the palm grow cycle induces that production will level off from about 2015, and that should be supportive for palmoil prices.

[skanjete]

Thoughts on Keck seng? I think these guys have quite a bit of palm oil plantations.

 

Yes they have some palmoil investments, but that's only a small part of their total investments.

 

I also think that plantations in Indonesia are a lot more productive and profitable than in Malaysia in recent years. Labour and farmland in Malaysia got a lot more expensive than in Indonesia.

Malaysia started a few decades earlier with their palmoil investments. In fact, in Malaysia, a lot of industrial activity and other value-added industries got derived from a start in palmoil. So much so that former agricultural areas are now developing in industrial and residential areas.

 

A company like Bertam Bhd was formerly a palmoil plantation, but gradually sold off all their farmland as residential land and evolved into a real estate business. Of course this process generated a gigantic surplus value. The proceeds got partly reinvested in palmoil land in Indonesia by the way.

 

 

 

[skanjete]

I did comment/speculate somewhat on the supply side of palmoil for the coming years.

 

But I immediately agree that this is no sure fact. As I said in a prior post, there's the biofuel factor to consider as well. However, lately, palmoil prices seem to agree with my estimation.

 

Luckily, for an investment in Anglo Eastern Plantations, you don't need a rising palmoil price. It is cheap any way you look at it, under any circumstance. They are valued at roughly 6.000$/hectare while (listed) Indonesia plantations are valued at about 20.000-25.000$/ha. In Malaysia, it's even higher.

 

Also from a cash flow point of view, it's interesting (cfr. my previous post) with P/FCF of 6 and E.V./EBITDA of less than 4.

 

[Green King]

Skanjete Great post

 

How do you figure the supply situation ?

 

Just trying to learn how to do that type of fundamental analysis.

 

TIA

 

Sorry, Green King, I only now saw your response.

 

About the supply situation. I've been following the sector and it's different companies for at least 10 years.

 

And if you list up the expansion investments all these companies did over the last 15 years, they all have some common things :

- first a period from 1998-2002 after the Asian crisis during which there were very few expansion investments. During this period, palmoil prices were relatively low and in combination with the bank sector problems at the time there was no money to invest in expansion.

- from 2003 on, palmoil prices started to firm, not coïncidentally 5-6 years after the period of under-investment. The plantations started to get higher cash flows, loans got refinanced and expansion planting started again.

- this continued until 2008, and with the crisis, expansion basically stopped in 2009. Things picked up a little bit again in 2010, but from then on, there was a lot more restrictive regulation because of environmental concerns. Companies didn't get no permits to expand and some farmland previously destined for palmoil such as peatland got there permits revoked. It's a lot thougher at the moment to expand plantations, even as the cash is available (consider Anglo Eastern with lots of net cash).

 

This thing is not company specific, but can be identified industry-wide.

 

So, as we know that a tree takes 5 years to start producing and 8 years to fully mature, the palm grow cycle induces that production will level off from about 2015, and that should be supportive for palmoil prices.

 

Thanks for the reply

My first investment was on Agricultural commodity sector. Most of the profit is generated is when you plant at the point where the prices for your commodity is the lowest and the finance for expansion is non existent. Rest of the time marginal return is produced.

 

What i have problem with is the fact that this is not a good business and a lot of the cash flow has to be reinvested base on my look at the statement of Cash flows.

 

Can you tell me what is  Purchase under investing activities ? At the end of every year you end up with 30 to 20 million of new cash left and the rest has to be put back into the business. (from what i read)

 

Other than that this looks like a very safe long term investment. (Maybe i'll buy it for retirement) With a huge pay off if the country starts to develop. I don't know much about market valuation of land per hec since its not back up by cash-flow. Asset plays are uncertain you could end up with Sears or JCP a lot of asset value but slow to realize them. when not backed up with great productive economic activity.

 

What do you think the numbers will look like in 5 to 10 years ?

 

[skanjete]

Skanjete Great post

 

How do you figure the supply situation ?

 

Just trying to learn how to do that type of fundamental analysis.

 

TIA

 

Sorry, Green King, I only now saw your response.

 

About the supply situation. I've been following the sector and it's different companies for at least 10 years.

 

And if you list up the expansion investments all these companies did over the last 15 years, they all have some common things :

- first a period from 1998-2002 after the Asian crisis during which there were very few expansion investments. During this period, palmoil prices were relatively low and in combination with the bank sector problems at the time there was no money to invest in expansion.

- from 2003 on, palmoil prices started to firm, not coïncidentally 5-6 years after the period of under-investment. The plantations started to get higher cash flows, loans got refinanced and expansion planting started again.

- this continued until 2008, and with the crisis, expansion basically stopped in 2009. Things picked up a little bit again in 2010, but from then on, there was a lot more restrictive regulation because of environmental concerns. Companies didn't get no permits to expand and some farmland previously destined for palmoil such as peatland got there permits revoked. It's a lot thougher at the moment to expand plantations, even as the cash is available (consider Anglo Eastern with lots of net cash).

 

This thing is not company specific, but can be identified industry-wide.

 

So, as we know that a tree takes 5 years to start producing and 8 years to fully mature, the palm grow cycle induces that production will level off from about 2015, and that should be supportive for palmoil prices.

 

Thanks for the reply

My first investment was on Agricultural commodity sector. Most of the profit is generated is when you plant at the point where the prices for your commodity is the lowest and the finance for expansion is non existent. Rest of the time marginal return is produced.

 

 

 

You're correct. That's the general rule in commodity businesses.

But in one of my first posts on this threads, I explained why I think that the palmoil sector (as a sector then) has a competitive advantage in comparison with other vegetable oils like soy, canola, coconut or sunflower (5-10 times as productive and thus cheaper to produce). So their returns are protected by this competitive advantage and are certainly not marginal.

 

The fact that the palmoil sector has procured some really big companies, starting out of pure palmoil production, says something.

[skanjete]

 

 

What i have problem with is the fact that this is not a good business and a lot of the cash flow has to be reinvested base on my look at the statement of Cash flows.

 

Can you tell me what is  Purchase under investing activities ? At the end of every year you end up with 30 to 20 million of new cash left and the rest has to be put back into the business. (from what i read)

 

 

I can't agree. Once a hectare of palm is mature, most of the cash flow is free. There's only some depreciation from the factory that has to be accounted for.

 

Purchase under investing activities is the investment in (mainly new) palm oil plantations : infrastructure, trees, crushing factory,...

 

You're correct that the reinvested most of their cash flow in the business. But these investments were mainly expansion investments. In the 10 years from 2003-2012, they invested about $287m in the business. In the same period however, they expanded their plantations from 22724 ha to 58977ha. So they developed 36.253ha at a cost of less than 8.000$/ha. The actual expansion cost will be somewhat lower, because the 287$ also include replacement investments.

This 8000$/ha is very efficient, if you compare it to competitors who need about 15.000$/ha to develop. It's one of the reasons I stated that AEP is one of the best operators.

 

The investment is also financially attractive if you compare it to the 1.250$ of cash flow a mature ha of palm produces. Granted, the cash flow doesn't come from the first day, but the investment of 8000$/ha is also spread over some years.

 

PS. It also gives an idea of the valuation of AEP at 6.500$/ha. In view of the cost to develop a ha of palm, the valuation of competitors at 15.000-20.000 seems to make more sense.

 

[skanjete]

 

Other than that this looks like a very safe long term investment. (Maybe i'll buy it for retirement) With a huge pay off if the country starts to develop. I don't know much about market valuation of land per hec since its not back up by cash-flow. Asset plays are uncertain you could end up with Sears or JCP a lot of asset value but slow to realize them. when not backed up with great productive economic activity.

 

What do you think the numbers will look like in 5 to 10 years ?

 

I hope I succeeded in explaining why the assets are backed up by cash flow. Their cash flow is mostly free, and their reinvestments were almost completely expansion investments.

I don't consider this as an asset play, although at some point in the future, it could.

 

numbers in 5 to 10 years : based on their expansions of the last decade and their maturity profile, I guess that only 2/3 of their hectares are mature and fully producing. Over the next 5-8 years, substantially all of their acreage will be mature and generate cash flow.

This extra cash flow basically needs no extra investments, apart from a factory they are still building out in 2014. This extra revenue also is higher margin, because the cost to harvest, fertilize, and maintain a immature hectare is about the same as a fully producing and mature hectare.

 

So I guess that at these palmoil prices, and exchange rates, a free cash flow of 1,1-1,5 £/sh should be possible over the next few years. Remember, this assumes no extra investments and no higher palmoil prices. Of course, it is very conservative to assume no extra investments. But in that case there is no need for the net cash of 1£/sh which they can return. So you're looking at a free cash flow of 1,1-1,5£/sh on an investment of 5,75£/sh. With higher or lower palmoil prices, this picture changes drastically of course...

[Green King]

 

Other than that this looks like a very safe long term investment. (Maybe i'll buy it for retirement) With a huge pay off if the country starts to develop. I don't know much about market valuation of land per hec since its not back up by cash-flow. Asset plays are uncertain you could end up with Sears or JCP a lot of asset value but slow to realize them. when not backed up with great productive economic activity.

 

What do you think the numbers will look like in 5 to 10 years ?

 

I hope I succeeded in explaining why the assets are backed up by cash flow. Their cash flow is mostly free, and their reinvestments were almost completely expansion investments.

I don't consider this as an asset play, although at some point in the future, it could.

 

numbers in 5 to 10 years : based on their expansions of the last decade and their maturity profile, I guess that only 2/3 of their hectares are mature and fully producing. Over the next 5-8 years, substantially all of their acreage will be mature and generate cash flow.

This extra cash flow basically needs no extra investments, apart from a factory they are still building out in 2014. This extra revenue also is higher margin, because the cost to harvest, fertilize, and maintain a immature hectare is about the same as a fully producing and mature hectare.

 

So I guess that at these palmoil prices, and exchange rates, a free cash flow of 1,1-1,5 £/sh should be possible over the next few years. Remember, this assumes no extra investments and no higher palmoil prices. Of course, it is very conservative to assume no extra investments. But in that case there is no need for the net cash of 1£/sh which they can return. So you're looking at a free cash flow of 1,1-1,5£/sh on an investment of 5,75£/sh. With higher or lower palmoil prices, this picture changes drastically of course...

 

Sorry for the later reply i got lazy. :)

 

So what is the reason for the recent decrease in Palm planted per ha relative to investments in PPE ? Change in economics ? or increase in Land prices ? That was the point i decided to stop looking.

 

          PPE purchase      Plam Plannted (Ha)

2008  20 M                      2242

2009  40 M                      4479

2010  44 M                      7580

2011  50 M                      1900

 

* PPE investment in property from morning star conformed close enough numbers from annual report

 

http://financials.morningstar.com/cash-flow/cf.html?t=AEP&region=gbr&culture=en-US&ownerCountry=USA

* Ha planted from annual report 2008 to 2011

[watsa_is_a_randian_hero]

I own a small position in SIPEF (Société Internationale de Plantations et de Finance).  I've owned it for a couple years now.  It has underperformed my original projections due to price declines in the palm oil prices because of supply/demand. 

 

I still own it though, I bought it as a long-term inflation hedge, because it was priced cheap relative to its peers, and it has a good track record.  It was written up in Grants Interest Rate observer back in 2012, thats where I originally heard about it. 

[skanjete]

 

Other than that this looks like a very safe long term investment. (Maybe i'll buy it for retirement) With a huge pay off if the country starts to develop. I don't know much about market valuation of land per hec since its not back up by cash-flow. Asset plays are uncertain you could end up with Sears or JCP a lot of asset value but slow to realize them. when not backed up with great productive economic activity.

 

What do you think the numbers will look like in 5 to 10 years ?

 

I hope I succeeded in explaining why the assets are backed up by cash flow. Their cash flow is mostly free, and their reinvestments were almost completely expansion investments.

I don't consider this as an asset play, although at some point in the future, it could.

 

numbers in 5 to 10 years : based on their expansions of the last decade and their maturity profile, I guess that only 2/3 of their hectares are mature and fully producing. Over the next 5-8 years, substantially all of their acreage will be mature and generate cash flow.

This extra cash flow basically needs no extra investments, apart from a factory they are still building out in 2014. This extra revenue also is higher margin, because the cost to harvest, fertilize, and maintain a immature hectare is about the same as a fully producing and mature hectare.

 

So I guess that at these palmoil prices, and exchange rates, a free cash flow of 1,1-1,5 £/sh should be possible over the next few years. Remember, this assumes no extra investments and no higher palmoil prices. Of course, it is very conservative to assume no extra investments. But in that case there is no need for the net cash of 1£/sh which they can return. So you're looking at a free cash flow of 1,1-1,5£/sh on an investment of 5,75£/sh. With higher or lower palmoil prices, this picture changes drastically of course...

 

Sorry for the later reply i got lazy. :)

 

So what is the reason for the recent decrease in Palm planted per ha relative to investments in PPE ? Change in economics ? or increase in Land prices ? That was the point i decided to stop looking.

 

          PPE purchase      Plam Plannted (Ha)

2008  20 M                      2242

2009  40 M                      4479

2010  44 M                      7580

2011  50 M                      1900

 

* PPE investment in property from morning star conformed close enough numbers from annual report

 

http://financials.morningstar.com/cash-flow/cf.html?t=AEP&region=gbr&culture=en-US&ownerCountry=USA

* Ha planted from annual report 2008 to 2011

 

There are several reasons for that :

- first as you state valuation for farmland has gone up a lot over the last few years. That's also why their current valuation is very cheap. However, that's a minor reason

- more importantly, it has to do with the maturity profile of their expansions. A hectare of palmoil only starts to produce after 4 years and reaches maturity after 8 years. So they capitilize costs until at least the 4th year. These investments aren't completely made at the very first day of course. For example, the factory needed to crush the fruit, has only to be built just in time to start crushing when the trees start fully producing, thus in year 6-7 or so.

 

So, suppose the company expands every year with 1000ha. After 5 years, the company not only has to invest in the planting of new trees of the current year 1000ha, but also some fertilizing of 4year old trees which costs are being capitilized or the building of the factory for the 5 year old trees which will start producing. This dynamic guarantees that according to the accounts, the investment cost/planted ha rises over the years, although in reality it's constant.

 

To give an idea of the investment costs :

- compensation + licenses : 1500$/ha

- planting (biological assets) : 3000-3500$/ha

- Infrastructure (road, bridges, living compounds,...) : 2000$/ha

- factory : 2000-5000$/ha (mainly depending on subsoil, and environmental investments)

Total : 8.500-12.000$/ha

 

These are current figures I got from Sipef, but as I stated before, AEP has lower investment costs.

 

Conclusion : there surely is an element of inflation, but the main reason is the maturity profile of their plantations. They are in the process of building 2 (first is now finished, second continuing) new factories because of maturing plantations, so this should explain it a bit.

[skanjete]

I own a small position in SIPEF (Société Internationale de Plantations et de Finance).  I've owned it for a couple years now.  It has underperformed my original projections due to price declines in the palm oil prices because of supply/demand. 

 

I still own it though, I bought it as a long-term inflation hedge, because it was priced cheap relative to its peers, and it has a good track record.  It was written up in Grants Interest Rate observer back in 2012, thats where I originally heard about it.

 

It's a well managed company. I've been a shareholder in the past from about 2002-2011, mainly through their subsidiary Jabelmalux which got taken over by Sipef in 2011.

 

At this point I think AEP is at least as well managed as Sipef, but cheaper. I've spoken to somebody from senior management of Sipef who confessed he bought some AEP shares. There were other reasons as well, but AEP was his most competent and cheaply valued competitor he told.

[Green King]

 

Other than that this looks like a very safe long term investment. (Maybe i'll buy it for retirement) With a huge pay off if the country starts to develop. I don't know much about market valuation of land per hec since its not back up by cash-flow. Asset plays are uncertain you could end up with Sears or JCP a lot of asset value but slow to realize them. when not backed up with great productive economic activity.

 

What do you think the numbers will look like in 5 to 10 years ?

 

I hope I succeeded in explaining why the assets are backed up by cash flow. Their cash flow is mostly free, and their reinvestments were almost completely expansion investments.

I don't consider this as an asset play, although at some point in the future, it could.

 

numbers in 5 to 10 years : based on their expansions of the last decade and their maturity profile, I guess that only 2/3 of their hectares are mature and fully producing. Over the next 5-8 years, substantially all of their acreage will be mature and generate cash flow.

This extra cash flow basically needs no extra investments, apart from a factory they are still building out in 2014. This extra revenue also is higher margin, because the cost to harvest, fertilize, and maintain a immature hectare is about the same as a fully producing and mature hectare.

 

So I guess that at these palmoil prices, and exchange rates, a free cash flow of 1,1-1,5 £/sh should be possible over the next few years. Remember, this assumes no extra investments and no higher palmoil prices. Of course, it is very conservative to assume no extra investments. But in that case there is no need for the net cash of 1£/sh which they can return. So you're looking at a free cash flow of 1,1-1,5£/sh on an investment of 5,75£/sh. With higher or lower palmoil prices, this picture changes drastically of course...

 

Sorry for the later reply i got lazy. :)

 

So what is the reason for the recent decrease in Palm planted per ha relative to investments in PPE ? Change in economics ? or increase in Land prices ? That was the point i decided to stop looking.

 

          PPE purchase      Plam Plannted (Ha)

2008  20 M                      2242

2009  40 M                      4479

2010  44 M                      7580

2011  50 M                      1900

 

* PPE investment in property from morning star conformed close enough numbers from annual report

 

http://financials.morningstar.com/cash-flow/cf.html?t=AEP&region=gbr&culture=en-US&ownerCountry=USA

* Ha planted from annual report 2008 to 2011

 

There are several reasons for that :

- first as you state valuation for farmland has gone up a lot over the last few years. That's also why their current valuation is very cheap. However, that's a minor reason

- more importantly, it has to do with the maturity profile of their expansions. A hectare of palmoil only starts to produce after 4 years and reaches maturity after 8 years. So they capitilize costs until at least the 4th year. These investments aren't completely made at the very first day of course. For example, the factory needed to crush the fruit, has only to be built just in time to start crushing when the trees start fully producing, thus in year 6-7 or so.

 

So, suppose the company expands every year with 1000ha. After 5 years, the company not only has to invest in the planting of new trees of the current year 1000ha, but also some fertilizing of 4year old trees which costs are being capitilized or the building of the factory for the 5 year old trees which will start producing. This dynamic guarantees that according to the accounts, the investment cost/planted ha rises over the years, although in reality it's constant.

 

To give an idea of the investment costs :

- compensation + licenses : 1500$/ha

- planting (biological assets) : 3000-3500$/ha

- Infrastructure (road, bridges, living compounds,...) : 2000$/ha

- factory : 2000-5000$/ha (mainly depending on subsoil, and environmental investments)

Total : 8.500-12.000$/ha

 

These are current figures I got from Sipef, but as I stated before, AEP has lower investment costs.

 

Conclusion : there surely is an element of inflation, but the main reason is the maturity profile of their plantations. They are in the process of building 2 (first is now finished, second continuing) new factories because of maturing plantations, so this should explain it a bit.

 

Thanks Can't believe i miss the plant Capex. i remember reading it in the annual report. i will hope i won't miss these things again. back to more reading.