Sime Darby Plantations – is this a growth company

[i4value]

Since its listed on Bursa Malaysia in Nov 2017, its revenue grew at 24 % CAGR (2018 to Sep LTM 2023). Over the same period net income grew at 56 % CAGR. But its total assets only grew at less than 3 % CAGR.

So, is this a growth company? What do you look at when assessing whether a company is a growth one?  Professor Damodaran opined that we should link growth to the business fundamentals. Growth needs to be funded and can be estimated from the fundamental equation of growth = Return X Reinvestment rate.

I estimated that over the past 5 years, its Return as measured by the NOPAT/Capital averaged 6%. Its Reinvestment rate average 12%. Growth was less than 1 %. So is this a growth company?

Why is growth important from an fundamental investor perspective? This is because the intrinsic value depends on what you estimate as the growth rate. If you want to explore this growth issues further, refer to “Do you want to know how to value growth companies?”

[weijian]

hi i4value,

A plantation business can be a growth business, provided it has relatively young plants (3-5years old) in huge proportions, and then has the resources to continue to do new planting to keep the average age of the trees young. As 3-5years old trees mature, their productivity improves tremendously. In general, it starts to get inefficient in operating terms when the trees go beyond 20years old (mature trees' fruit production starts to deteriorate VS more work required to harvest it at such heights.

Do we have such tree demographics for SDP? (Probably not because such large estates always have spread-out maturities so that their downstream refineries will always have raw material to process. Very similar to how a bond fund will always have bonds of different maturities)

SDP has plantations in 3 regions - Msia, Indonesia and Papua New Guinea. The OER and OPM for Msia ops are always lower than Indonesia/Papua New Guinea. So there is an opportunity to grow via extracting more efficiencies for Msia, which makes up almost 50% of FFB production. Would Msia match up to Indonesia/PNG?

[i4value]

There are 2 ways to grow - organically and via M&A. A lot of the companies in the US grew via acquisitions. This is not the common growth path for Bursa companies. What you have said is organic growth and I think there are limits to such growth for the plantation companies. Unfortunately the M&A are far in between.