Kencana Agri

Hi CP,

I was going to do the Tuan Sing valuation. But, ended up quite bz and somehow I did the Kencana analysis. Its done early morning... literally.

It sounds crazy. But, I have out of the world valuation figures and my highest valuation (optimistic figure) is like 77 cents with 33 times pe, assuming that CPO prices recover. I used Mundi websites palm oil prices as proxy to forecast the benefit to revenue, as a result of CPO recovery this year.

On the extreme, I made a silly assumption of 23 times PE and that palm prices constant, this resulted in a price of 12.1 cents. Quite unlikely.

With some analysis of the bio assets, I managed to derive an assumption that mature plantation should be 15% more in terms of area, compared to prior years. Certainly, the annual report seems to be pointing to consistently increasing maturing plantations, while a steadily slowing rate of increase in immature plantations. This bodes well, since it points to higher rate of output.

I think if Morph (or anyone else) is entering big into this, they are not wrong. There seems to be a good reason and basis (using my half baked concept of palm biz) for Kencana to be a multi bagger. Gotta believe you for this one.

And I have not loaded any factor for el nino effects and the regulatory impact on bio diesel blending in indonesia. I suspect the prices will be flying off the roof, with those factors loaded in. And, if I didn't account for the fair valuation gain on bio assets and other receivables, this already is giving a pretty high valuation based on optimistic and mid way forecasts. You can tweak the spreadsheet. CP is going to make a pile again. Congrats on your finding.

Guess Mr Mkt still don't think this is the case for now. For Wilmar to buy at 35 cents, this gem shouldn't stay at 20 cents for too long. http://sbr.com.sg/agribusiness/news/wilm...a-holdings

PS: For the rest of the VB, do post your critic. Hope this sheds light on this gem.

am just comparing with another company, called global palm resources
1) it has higher profit margin and better profit history
2) better cash flow, and debts
3) better dividend giveouts
4) better PE ratio

kencana has more plantation area and unlocked potential, as what I have perceived in the analysis in previous posts, but how long does it take to realize it?

(29-05-2015, 08:03 AM)jjlim84 Wrote: am just comparing with another company, called global palm resources
1) it has higher profit margin and better profit history
2) better cash flow, and debts
3) better dividend giveouts
4) better PE ratio

kencana has more plantation area and unlocked potential, as what I have perceived in the analysis in previous posts, but how long does it take to realize it?

Thats the million buck question. I suspect the primary catalyst has to come from the recovery of cpo prices due to the el nino effect n the regulations on biodiesel blending.

The area of maturing plantation has increased quite significantly. This gives very good likelihood of better harvests though I m wondering if this should outweigh effects of el nino.

Thanks for sharing. Shall have a look at that too.

Ps: anyone noticed the heavy fx losses?

Ps: Bad weather? http://sbr.com.sg/agribusiness/news/plan...ips-region So zhun, not sure if cp posted. Apologies in advance, if this was posted anywhere else. :|

http://www.reuters.com/article/2015/05/2...I220150522 Reuters news. Quite interesting outlook.

Key is still CPO price.
Recovery of oil price + onset of El nino = explosive CPO price => Good profits
If Kencana slows down the pace of planting, it should be able to book profits.

But this will impact on future year's profits. So, it has to calibrate the pace of planting to optimize both short term and long term profits

(01-06-2015, 10:37 PM)Curiousparty Wrote: Key is still CPO price.
Recovery of oil price + onset of El nino = explosive CPO price => Good profits
If Kencana slows down the pace of planting, it should be able to book profits.

But this will impact on future year's profits. So, it has to calibrate the pace of planting to optimize both short term and long term profits

Slow pace of planting? With the poor profits, planting rates should be higher to breakeven? It seems the other cause of poor profits is the large portion of immature plantations. Low price plus low volume = poor profits n losses. High price plus high volume then make big.

Planting costs should be cost of sales and "crystalises" at time of sale. Correct me if I m wrong.

I'm not intentionally talking down this stock, but kencana agri has comparatively the lowest profit and operating margins among the palm oil companies listed in sgx at a glance, what is the hidden potential behind it? More room for improvement compared to others? Or is it something about the business model which is different?

CPO price is key, but it is the same for all companies too

New plantings would cost much more compared to operating costs from existing plants.
e.g. one has to clear the forest, etc.

Hence, if the rate of new plantings is reduced, profits can easily go up, but it will affect future profits.

(02-06-2015, 08:50 AM)Curiousparty Wrote: New plantings would cost much more compared to operating costs from existing plants.
e.g. one has to clear the forest, etc.

Hence, if the rate of new plantings is reduced, profits can easily go up, but it will affect future profits.

Good point CP.

I was guessing that the new planting cost should be capitalised and amortised over useful life of the plantation. So, there should be no material impact on the profits, until the harvests occur? It doesn't sound right for the planting cost to be treated as period costs. Just my thoughts. Correct me if I'm wrong.

Then again, reducing new plantings is a short termistic measure, it seems. Thanks for the insight.

global economy is plainly not doing well, many "macro" indicators are not very encouraging. Commodity super cycle is now over with China "cooling down" and their appetite for commodities slowing down A LOT.

since palm oil sector not doing well, palm oil counter will also not do well. no point to analyse small details like their immature/mature plantations, though its interesting to know the details of the business if you are vested.

Wait till the tide is rising it will float all boats before jumping in is better.

Plantation counters are becoming so undervalued that the risk of privatisation at low price is there for some of them. Kencana last AR shows almost 90% is owned by the top 20 shareholders.

It will be in their interests to keep liquidity and prices low until such time they have enough ammo or price drops too much that they can do a delisting.

http://www.mpoc.org.my/Malaysian_palm_oi...nggit.aspx

Malaysian palm oil price hits 3-month high on soyoil rally, weak ringgit