Kencana Agri

[johnnydash]

Hi,

On what basis are you saying that? And when do you think oil price will drop to that drastic level? Next year, two years from now?

Johnny this is some background on CPO prices
Story of CPO price

Historical CPO prices CHART

Oil price low or high, there is a good chance of palm oil reaching RM1500 levels or below as you can see from the chart of Aug2004 - Jun2006 which was not so very long ago.

[jjlim84]

profit margin for kencana agri has not been too good, moreover it has quite high current liaibilities imho (current ratio: 0.68)
Am interested in this counter, but will wait and see

[johnnydash]

profit margin for kencana agri has not been too good, moreover it has quite high current liaibilities imho (current ratio: 0.68)
Am interested in this counter, but will wait and see

well, the low profit margin for kencana masks its latent earning power.
part of the reason for the lower profit margin is that it purchases much greater proportion of third party ffb for processing. processing has a low margin of 7%. if you were to click on the latest third quarter results for kencana, first resources and bumitama, you may see the figures for yourself and figure out how significant this factor is.

my own thoughts are that the palm oil industry is a great industry to be in. industry roe has been high, EVA has been positive even if we stretch the time period back before the china led commodity boom. for the past two decades there also has been numerous multibaggers company on the bursa and indonesia exchange.

a major source of strength for the industry is its high barriers to entry. new entrants have to invest in capital and incur costs for 3 years before the trees even start to produce anything. even so the tree at this stage will still be low yielding. its a couple of more years before company turns profitable, a while more before the company recovers initial investment, and still a while more before the company embarks on a sustainable path of growth by acquiring new land and having extra cash flow for further planting. in addition to this, trying to enter, grow in this profitable industry in a big way in indonesia especially requires political connections.


any comments from valuebuddies?

[opmi]

If you like palm oil company with young, mature palm, look at KLSE listed Jaya Tiasa.



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[johnnydash]

Yes I know about jaya tiasa in fact i always try and find what is in my opinion the best company in a particular industry before i decide to initiate exposure.

There are a couple of reasons why i prefer kencana. 50% of kencana trees are immature. This is one of the if not the largest proportion of immature trees in the industry. Immature trees are those that have not produced at all and so are piosed for the greatest growth. This compares with 16% for jaya tiasa.

Next, land cost is one of the most significant cost. And yet acquisition of land is a must for further growth in the future. Below is an excerpt from jaya tiasa's annual report.

Oil Palm Plantation
Total Land Area: 83,480 hectares
Estimated Plantable Area: 69,873 hectares
Planted Area*: 66,283 hectares
Matured Area*: 59,031 hectares

This compares with kencana which has about 192 000 hectares land bank and have used only about 66 000 hectares. Land in Malaysia is more expensive as well.

The next reason is plantation in malaysia have higher cost of production a combination of higher land cost,labour as well as lower yield due to less favourable climate and soil conditions. For commodities, lower cost producers have tremendous advantage being able to have higher cash flows and taking advantage of down turn to reinvest at lower prices.

Lastly, jaya tiasa is not a pure play on palm oil. in fact 68.9% of its revenue last year came from logging operations!

But of course all this analysis are incomplete without a analysis on valuation. In terms of valuing palm oil companies i think EV/ha of plantation , market cap/ha of plantation, and forward pe with special attention to age of trees, cost of production and land bank are particularly useful. To that end I think value may have emerged for jaya tiasa due to the latest sell down in malaysia strictly from a rebound pov.

But my own valuation plus analysis( of not a few plantation companies ) leads me to think that kencana is on a faster more sustainable path of growth. The proof is in the pudding you may wish to just pick any plantation company and do what I have done above and see if you reach different conclusions.

If you like palm oil company with young, mature palm, look at KLSE listed Jaya Tiasa.



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[johnnydash]

caveat emptor, i have been collecting kencana at 0.2-0.21. and hope to continue to do so. i have no interest in trying to sing the praises about the company to prop up the price. in fact as respectable as this forum is im not sure if it can sway markets, especially not through words written by me.

im more interested in clarifying my own thoughts/ testing the soundness of my own analysis, trying to learn more from valuebuddies(i have benefited much over the past few years although I have been relatively quiet). personally i find it strange that palm oil companies has attracted so little discussion on this forum because it seems like it is in a favourable industry, one in which companies can compound their value at a good rate over a long period of time.

[BlueKelah]

caveat emptor, i have been collecting kencana at 0.2-0.21. and hope to continue to do so. i have no interest in trying to sing the praises about the company to prop up the price. in fact as respectable as this forum is im not sure if it can sway markets, especially not through words written by me.

im more interested in clarifying my own thoughts/ testing the soundness of my own analysis, trying to learn more from valuebuddies(i have benefited much over the past few years although I have been relatively quiet). personally i find it strange that palm oil companies has attracted so little discussion on this forum because it seems like it is in a favourable industry, one in which companies can compound their value at a good rate over a long period of time.

Since 2011 palm oil and rubber stocks have been in retreat due to commodity price of these 2. Palm oil price has not bottomed totally yet, just like oil price, has lot more downside potential if you look at prices 10 years back.

Normally such companies will have little discussion here. People like to discuss hot counter, even here @ valubuddies, mostly those stock price moving, people will discuss.

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[johnnydash]

I think history may be instructive but we dont drive forward looking in the rear view mirror.

Odds are very good that the next few years, prices will be higher then current level. If we take current price as current level of equilibrium, we can examine the demand and supply factors to see if there are strong reasons that prices will move either to higher or lower level.

Supply side
1. new plantings in Indo and Malaysia have slowed drastically since 3 years ago.
2. both authorities seem to be reluctant to hand out new permits now due to environmental pressures.
3. malaysia palm trees are reaching their end of useful life faster than they are being replaced. age of plantations means that yields are on the cusp of experiencing a downtrend.
4. there is shortage of plantation workers in malaysia because wage level in the country has risen so much; this has already placed negative pressure on yields in recent years and look set to continue.
5. the price level a few months ago was already reaching the running cost of production for small holders(30%-40% of all producers). there are reports that small holders have cut back on application of fertilizers during those months. it may even have reached closed to the all in cost for some plantation companies.


demand side
1.demographic trends: growing population in indonesia india china.
2.economic trends: higher income, more consumption of palm oil per capita. positive in developing countries and to a smaller extent developed countries.

note: palm oil is used in more than half of products found in a typical supermarket.

Lower supply growth(or even stagnating), higher demand growth will lead to a new equilibrium.

[Curiousparty]

The biggest problem with Kencana now is its declining cash holding, which will slow down its pace of planting (for the future).

Hence, it will have an impact on its future yield and hence profit.


Would Kencana do a rights issue to boost its cashflow position?

[Curiousparty]

The Edge Singapore
January 19, 2015
Corporate: Palm oil shrugs off crude oil slump for now, but choose planters well, analysts say

The slump in crude oil prices, and the overall bearish market sentiment, have pushed the prices of several commodities lower. However, the prices of crude palm oil (CPO), while lower than what they were a year ago, have remained at a comparatively steady level. Indeed, after trading sideways for much of 4Q2014, CPO spot prices began to pick up from their lows in mid-­December. Analysts who track the palm oil sector are keeping their CPO price forecasts at an average of about RM2,500 per tonne for 2015, and Singapore-listed palm oil stocks appear to be riding on the positive trend.

However, the price support for CPO may not be a sustained one. "CPO prices have recovered lately due to heavy buying caused by concerns about crop damage by the above-­average rainfall and flooding in Peninsula Malaysia," noted UOB Kay Hian analysts in a Jan 13 report. "This is a short-term rally, which is likely to subside once the low production season is over, ie March/April 2015."

Last month, several states in Malaysia, the world's second-largest palm oil producer after Indonesia, were inundated by the worst floods in 30 years after unexpectedly severe monsoon rains. The floods, which forced more than a quarter million people from their homes, also damaged swathes of plantation land. According to CIMB Research, four of the worst-hit states - Terengganu, Pahang, Kelantan and Perak - accounted for nearly a third of Malaysia's palm oil supply in 2013. The palm oil mills' output in the southern states of Pahang, Johor and Malacca was estimated to be down 36% in December, from a month earlier.

According to CIMB Research, the Malaysian planters most affected by the floods include Felda Global Ventures, Sime Darby Plantation, and IOI Group, which have substantial estates in Pahang and Johor, the biggest-producing palm oil states after Sabah and Sarawak in East Malaysia. They had 67%, 29%, and 28% of their plantations impacted, respectively. Kuala Lumpur Kepong and Genting Plantations had 26% and 14% of their estates exposed, respectively.

As a result, Malaysia's palm oil inventories in December were 12% lower than in November, although still about 1% higher than in December 2013. In a Jan 13 report, CIMB Research estimates the inventory levels to remain weak in January, falling a further 6% from December owing to lower production. At the same time, a dry season in Malaysia early in 2014, and in the third quarter in Kalimantan, Indonesia, is also expected to hurt production yields.

Consequently, with an expected decline in supply, CPO prices are now about 10% higher than they were a month ago. Planters in Indonesia, many of who are listed in Singapore, have been the clear beneficiaries of this turn of events, CIMB Research analyst Ivy Ng notes. In tandem with the pick-up in CPO prices, shares in the palm oil companies also ticked upwards after a number of them hit their 52-week lows in mid-December. One of the world's largest producers, Golden Agri-Resources, has gained more than 8% since Dec 17. Indofood Agri-Resources, the agriculture arm of Indonesian food conglomerate PT Indofood Sukses Makmur, is trading some 10% higher than a month ago. First Resources' stock is 11% higher than its one-year low on Dec 19.

"Some investors may see some positives on the back of a rise in prices of CPO, which have been holding up relative to other commodities," Ng says. "Or perhaps others who are getting out of [crude oil investments] are looking for somewhere else to park their money." Will this rally pick up momentum and continue?

Supply and demand

Analysts point out that while, historically, there has been some correlation between the prices of crude oil and CPO, the factors influencing the supply and demand of CPO, and consequently its price swings, are more varied. Indeed, citing the volatility, palm oil companies that were contacted for their outlook on the industry and CPO prices have declined to comment for this story.

Apart from weather conditions, which impact yield and output, CPO prices are also strongly correlated to soybean oil prices. Another bumper year of soybeans in the US could weigh on CPO prices. As a vegetable oil, palm oil is also widely used in food products and processing, as well as in soaps and detergents. In recent years, demand for CPO has also come from its use as a feedstock for the production of biodiesel, supported by government mandates in Indonesia and Malaysia to blend as much as 20% of palm oil into biodiesel.

Certainly, the biofuel portion of demand is now subject to fluctuation as well, given that biodiesel is no longer economical with crude oil prices at a low. While part of it is government-mandated, analysts cite the risk of Indonesia and Malaysia backtracking on their biodiesel mandates. CIMB Research estimates that at US$50 per barrel of Brent crude, the breakeven price for CPO-biodiesel, inclusive of subsidies, is RM1,729 per tonne, which is more than a quarter lower than current CPO market prices. "The biggest risk [to CPO prices] is biofuel demand, if crude oil prices stay low," Ng says. Nevertheless, "palm oil is still a staple for food consumption, and so demand is less elastic [than crude oil]," she adds.

Importantly, while December production was weak, overall CPO output from Malaysia for 2014 was still some 2% higher y-o-y, supported by stronger production in East Malaysia. UOB Kay Hian notes that Sarawak's output was 10.5% higher y-o-y, while Sabah's production rose nearly 5%. At the same time, exports to the key consuming countries of China, Pakistan and the US were down significantly in 2014, or 23.3%, 43.2% and 22.6% lower, respectively. The shortfall was made up by 39% more exports to India, but overall exports were down 4.7% for the year.

As such, CIMB Research notes in the Jan 13 report that while CPO production could remain weak until next month, and together with the weaker ringgit and a potential El Niño dry spell could be a boost for CPO prices, it would only be a short-term positive. "We remain concerned that the weaker crude oil prices will have a lagged negative impact on CPO demand, which in turn could pose a key downside risk to CPO prices." The brokerage expects CPO to start trading lower from 2Q2015.

Selective stocks

CIMB Research has a "neutral" call while UOB Kay Hian is keeping its "market weight" rating on the regional plantation sector. Ng suggests investors buy into plantation companies "for a longer-term horizon", especially as it is likely that new planting and investments could start to slow. "There will be a supply crunch in the future."

UOB Kay Hian favours First Resources and Bumitama Agri. The two companies have among the youngest and highest-growth plantation profile among the planters, and UOB Kay Hian notes First Resources' markedly improved profitability in 2014 - a reported earnings before interest, taxes, depreciation and amortization per CPO tonne of US$410 compared with US$328 in 2009.

CIMB also likes First Resources "for its well-managed estates and attractive valuations", as well as Indonesia-listed Astra Agro Lestari "for its strong corporate governance and management", and Salim Ivomas Pratama "for its attractive valuations on an EV/ha basis".