Kencana Agri

[Curiousparty]

New Straits Times (Malaysia)
February 24, 2015 Tuesday
FGV may post weaker Q4 results

KUALA LUMPUR: Felda Global Ventures Holdings Bhd's (FGV) results for the fourth quarter ended December last year are expected to be weak, dragged down by soft crude palm oil (CPO) prices and low yield.

FGV, the world's largest CPO producer, will announce its results today.

Analysts said FGV's results will be weak partly because of low CPO prices as well as internal issues, such as ageing trees which have not been replanted and poor management.

"The regional managers are not walking the fields and there is heavy wastage, with fresh fruit bunches not harvested or harvested late, causing spoilage.

"There problems on the ground and the situation is compounded with some managers who have no plantation background," an analyst told Business Times yesterday.

MIDF Research analyst Nur Nadia Kamil said the fourth-quarter results are expected to be weaker mainly because of the lower average CPO prices.

"The price of CPO during the fourth quarter was down by about 13 per cent. This should translate into lower earnings for plantation companies.

We do not expect the CPO price to rebound significantly in the near future, hence we expect no surprises in FGV's earnings this year." The price setback should not hinder FGV from achieving its replanting target of 15,000ha this year, she said.

Nadia added that there is no strong re-rating catalyst for FGV, and therefore she kept her "neutral" call on the stock.

In the third quarter ended September last year, FGV posted a net loss of RM9.3 million compared with a net profit of RM22.8 million a year ago.

Revenue climbed to RM4.3 billion from RM3.2 billion.

Some research houses are cutting their forecasts for the planter.

Public Investment Bank said last week FGV's results will be less encouraging due to weaker CPO prices, continuous weakness in its downstream operations and impact from floods in the east coast of Peninsular Malaysia.

"We are less optimistic on the fourth-quarter results, given the weaker CPO price of RM2,193 a tonne, continuous struggle in downstream activities and an estimated loss of RM21 million from the impact of the floods," Public Invest said in its research note, downgrading FGV from "trading buy" to "neutral".

In an earlier report, CIMB Research said there was limited downside for FGV from current levels, with the market already valuing its plantation estates at below the replacement cost of new planting.

"Its move to sell non-core assets will help improve sentiment. However, the stock is unlikely to re-rate significantly as fourth-quarter earnings are likely to remain weak and could come in below consensus," said CIMB, lowering the target price from RM2.93 to RM2.33.

[vesfreq]

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?

Future profit also contingent upon whether there is capacity to produce. The plantations under Kencana are relatively young and there is more revenue upside potential once they achieve the optimal productivity rates of mature palm trees. Doubt financials will be earth shaking for the near term. Broker also advised me that this is a long term play.

Cash holding, I'm not too worried. They have been losing money for a while, so why lose sleep at this moment? Placement also seems possible. They could do a bond issue.

Prices are significantly lower than what Wilmar paid earlier on. At 20 +- cents, its a still good price to enter.

Moi vested, but small position.

PS: CP, vested in Kencana?

[Curiousparty]

Taking Bumitama as a benchmark, can Kencana achieve Bumitama GPM and NPM in say 2 years' time?

Tks for sharing..

[Curiousparty]

Hi Johnnydash

May I check how do u know Kencana is purchasing FFB from third parties for processing into palm oil?

Is this largely because there are not enough matured trees to produce enough FFB to fill up the capacity of its oil palm mills ?

What is your prelim estimate for Kencana to turn the corners? The average age of its plantations is around 7.4 yrs.... Are we there soon?

many tks.

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?

[johnnydash]

Hi curiousparty,

If you look at the financialandperformance review file, you can see the figures for the CPO that they produced for the quarter as well as the CPO that they sold for the quarter, which are always significantly higher. So the CPO that they sell includes CPO produced from FFB of third party as well as their own for the current quarter, as well as I think a little bit of CPO from the previous quarter(since they have storage capacity). KA processes a lot more 3rd party then fr and bumi. I think all three companies have third party sales figures in annual report as well(which may require some digging).

And yes the main reason i suppose is that the company has larger capacity than they can use for now since their trees are young. But its prudent to build for the capacity that you will eventually use at peak maturity as it maximises investment in the mills: You are going to have to have that number of mills anyway eventually, so why not build it first. The incremental cost of additional capacity is probably minimal anyway. At the same time, you can process for third party to earn that 5% margin.

As for when the turn around will be, honestly its hard to tell with commodity prices. The main price pressures come from super harvest of soy bean last year, inventory of which is still being cleared. In the coming harvest, seems like farmers have/have been planting even more in hope of another superb harvest, which just by probablity is unlikely to happen again. But the increase in soy planting itself may compensate for lower yields. of course crude oil drastic drop was a factor as well.

on the flip side there are updates with the biodiesel mandate, el nino, firmer oil prices going forward, and slow down in plantings etc. and historically its rare for palm oil price(perhaps even unprecedented) to be in a downtrend for 3 years which it is now. and their land is getting more valuable by the day due to sustainability concerns and a moraturium on new permits. so kencana is not just an earnings play for me, also an asset/privatisation play. you may google for plantation acquisitions to see how valuable their land is.

i think its hard to catch commodity plays right at the cusp of recovery. but for such cyclical companies, one will probably turn out alright with a longer term perspective and by buying at low(er) points, and definitely not at high points of the cycle years ago. long term prospects? its a good industry, an agricultural plant that is the highest yielding amongst oil seeds, and barriers of entry, with policy makers historically incentivised to keep the industry healthy(just look at the number of policy actions in the past year by both indonesia and malaysia to support the industry). new planting have slowed drastically for the past years so there will come a point where demand will outstrip supply.

for me the only question is whether financial turmoil(which means I can buy at a lower price) will come before that. my own view is that turmoil does not happen overnight and i probably can get out (at least some) before Sh** hits the fan. at the same time of course, i buy at a measured pace.

Hi Johnnydash

May I check how do u know Kencana is purchasing FFB from third parties for processing into palm oil?

Is this largely because there are not enough matured trees to produce enough FFB to fill up the capacity of its oil palm mills ?

What is your prelim estimate for Kencana to turn the corners? The average age of its plantations is around 7.4 yrs.... Are we there soon?

many tks.

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?

[Curiousparty]

Hi Johnnydash

Let's assume that CPO price remains stagnant at current level. But with more proportion of plantations entering maturity, is it possible for Kencana to still achieve a net profit for this FY?

Bumitama and FR have enviably high GPM and NPM, albeit some drop because of the low CPO price.

Tks.

[Curiousparty]

Platts Oilgram News, March 31, 2015 Tuesday

Indonesia eyes 40% cut in gasoil imports


Country to roll out higher biodiesel blending mandate April 1

Indonesia expects to cut its gasoil imports by 3.975 million kiloliters/year (25 million barrels/year), or 39.6%, in 2015, after the government's new higher biodiesel blending mandate takes effect from April 1.

According to data released by state-owned Pertamina earlier this year, the country was expected to import 63.104 million barrels of gasoil in 2015.

The Indonesian government earlier this month decided to raise the biodiesel blending proportion in gasoil used by the transport, household, commercial and industrial sectors to 15%, from 10% previously.

The blending mandate for gasoil used by power utilities remains unchanged at 25%.
Since the program will start on April 1, the gasoil import reduction estimates are only three-fourth of what can be expected in the full year, according to Rida Mulyana, renewable energy director general at the ministry of energy and mines.
Indonesia, the region's largest gasoil importer, imported 32.14 million barrels in 2014, according to data from Pertamina. This was down from 39.03 million barrels in 2013, after the government mandated 10% biodiesel blending last year.
Indonesia is estimated to consume 17 million kl (106.93 million barrels) of gasoil across all sectors in 2015. The government does not give a breakdown of demand by sectors.
The government has raised the blending mandate in a bid to help the country's economy due to the depreciation of the Indonesian Rupiah against the US dollar and cut gasoil imports.
"We expect to save around $2.5 billion in foreign exchange this year due to the higher biodiesel blending mandate," Mulyana said.

The blending proportion for gasoil used in transportation, industry, and commercial sectors will increase to 20% by January 2016 and 30% by January 2020. Biodiesel content in gasoil used by power utilities will be 25% in April 2015 and increase to 30% by January 2016 onwards, according to a copy of the decree signed by the energy minister on March 18, 2015.

Biodiesel supply
According to Mulyana, the new blending program will need 5.3 million kl/year of fatty acid methyl ester (FAME) once the new blending mandate kicks in. This is up 1.9 million kl from current levels.
Indonesia has an installed biodiesel production capacity of 5.8 million kl and there are at least four new companies interested in building biodiesel plants with a total capacity of 2.67 million kl, Mulyana said.
Separately, the government said that Indonesia was generally successful in meeting the 10% blending mandate in 2014, though this could not be achieved in some provinces due to infrastructure bottlenecks, according to bioenergy director at the energy and mines ministry Dadan Kusdiana.
"But we are optimistic that we will be able to meet the target of 15% this year. Pertamina has reiterated its commitment to supply biodiesel blended gasoil throughout the country," Kusdiana said.
Indonesia has made it clear that all the biodiesel required to meet the new blending mandate will have to be sourced domestically and imports will not be allowed.

[Curiousparty]

New Straits Times (Malaysia), May 14, 2015 Thursday

`El Nino to lift CPO prices'

KUALA LUMPUR: PALM oil prices may rise at a feverish pace should an El Nino weather pattern spur drought across Southeast Asia, drying up palm oil output across Indonesia, Malaysia and southern Thailand.

On Monday, the Australian Bureau of Meteorology announced a substantial El Nino weather phenomenon for 2015. Japan weathermen said while the thresholds were not met until now, they expect a significant event this year.

Incidentally, the Bursa Malaysia derivatives market has started to "heat up" with the third-month benchmark crude palm oil (CPO) futures hitting a high of RM2,225 per tonne a couple of days ago. Yesterday, palm oil futures slid RM27 to close at RM2,198 per tonne.

In an interview with Business Times, Malaysian Estate Owners Association (MEOA) president Joseph Tek Choon Yee recalled there were many El Nino forecasts a year ago but somehow it did not happen.

In March 2014, palm oil prices reached a high of RM2,922 per tonne in anticipation of an El Nino phenomenon.

As the threat dissipated, prices plunged to a low of RM1,943 per tonne in September before recovering to RM2,250 per tonne in December.

By mid-February 2015, Tek noted many MEOA members in Sabah started to experience bone-dry episodes at their estates.

CIMB Investment Bank senior analyst Ivy Ng said lower rainfall and soil moisture levels can hurt yields after a lag, with the effects of dry weather typically felt 10 to 12 months or 22 to 24 months later.

A moderate El Nino, combined with a strong execution of a biodiesel mandate in Indonesia, could benefit prices towards the end of 2015. In the near term, gains may be limited on seasonally high supply and reserves, she said in her notes to investors.

Explaining the impact of El Nino on plam oil trees, Tek said: "We will see an immediate delay in ripening of bunches and dangers of fire hazards in estates.

"A half-year lag effect will see some bunch failures and lower crop production. The second lag effect of flower abortion will ensue a year later with even lower crop output," he said.

"And a final two-year lag effect will see drastic slash in crop harvests due to the palms sprouting more male flowers. Only female flowers can eventually form into bunches," Tek added.

Asked if Malaysia is still able to harvest 20 million tonnes of oil this year, he said it depends on the severity of moisture stress.

Tek cautioned weather prospect is just one of the many factors determining price. Competing edible oils, crude mineral oil, inventory level and policies can also impact prices.

"As at end-April, Malaysia's CPO stock surpassed two million tonnes, following a stronger output set against weaker exports. However, there were probably delays in CPO exports in order to derive benefit from zero export tax starting next month," he said.

"With Ramadan around the corner and Indonesia pushing ahead with its biodiesel programme, I want to believe this time around in the wake of an El Nino, there will be an upward push in prices."

When pressed for a forecast, Tek replied, "Let's hope it can trade up between RM2,300 and RM2,400 per tonne".

( END )

[Curiousparty]

Did anyone notice that Morph Investment had increased its stake in Kencana ?

My gut feel is that if one is willing to wait out on Kencana, it is easily a few multi-baggers ....

More on Morph Investment:-
http://www.nextinsight.net/index.php/sto...t-heard-of

I thought their track record had shown that they were rather astute investors bidding their time when short term investors threw down their towels...

Someone wrote this at Next insight:-

"Morph is one of the best minds in value investing when it comes to S'pore listed companies. Many of these stocks that they held had been delisted (or going to be delisted) throughout the years like Haw Par Healthcare, Pan Pacific Hotels Group, Guthrie GTS, Superior Multi-packaging etc.

They also owned stocks like UOI, Straits Trading, SHC Asia, Lasseters, Haw Par, Khong Guan Flour Milling etc before but dropped out of the list.

Some of the other stocks that they still own besides your list include United Engineers, Isetan, Intraco, Sing Investment and Finance, Hotel Royal, Koyo International, Jacks International, Fung Choi, Keppel T&T, K1 Ventures etc.

I had been following them for the past few years and so far, most of their investments are spot on. However, one must be prepared to hold for very long term for value to be unlocked in these companies."

[Curiousparty]

El Nino May Spur Palm Oil Rally as UBS Highlights Impact

Palm oil may rally should an El Nino weather pattern spur dry conditions across Southeast Asia, hurting output, while key buyers such as China bring forward purchases to guarantee supplies.

Prices may advance to 2,500 ringgit ($694) a metric ton over the next three months, Maybank Investment Bank Bhd. analyst Ong Chee Ting said in a report on Wednesday. That’s 14 percent higher than Wednesday’s close on Bursa Malaysia Derivatives.

The return of an El Nino for the first time since 2010 was declared on Tuesday by Australia’s Bureau of Meteorology, which said that the event could be substantial. El Ninos influence conditions across the globe and in Asia they can bake Indonesia and Malaysia, the two largest palm oil producers. Planters’ stocks including IOI Corp. Bhd. in Malaysia rose on Wednesday.

“In the coming months, we expect palm oil export figures to pick up as end-buyers like China, with its low inventory level, may take a defensive strategy to stock up ahead, on fear of a possible supply crunch,” Ong said. While this will boost the palm oil price, the extent of any advance will depend largely on the El Nino’s intensity, Ong said.

Palm oil climbed to a five-week high in Kuala Lumpur on Tuesday after the El Nino announcement by the Australian forecasters. Futures ended 1.2 percent lower at 2,198 ringgit a ton on Wednesday. They last traded above 2,500 ringgit a ton in June.

Shares Advance

IOI climbed 3.4 percent to 4.30 ringgit, while Felda Global Ventures Holdings Bhd. retreated 0.5 percent. Both were raised to hold from sell at Maybank. PT Astra Agro Lestari shares surged 7.7 percent in Jakarta, while Bumitama Agri Ltd. advanced 1 percent in Singapore.

Palm oil production in Indonesia and Malaysia declined at the time of the last strong El Nino in 1997-1998. The two countries account for 86 percent of world supplies, according to the U.S. Department of Agriculture. Oil palms need about 150 millimeters to 200 millimeters of precipitation a month, according to the Malaysian Meteorological Department.

Lower rainfall and soil-moisture levels can hurt yields after a lag, with the effects of dry weather typically felt 10 to 12 months or 22 to 24 months later, Ivy Ng, an analyst at CIMB Investment Bank, said in a report.

A moderate El Nino, combined with a strong execution of a biodiesel mandate in Indonesia, could benefit prices in late 2015, Ng said in the report on Tuesday. Gains may be limited near term on seasonally high supply and reserves, she said.

“We have to remember that the impacts of El Nino tend to, perhaps particularly in palm oil, not be shown up immediately,” Wayne Gordon, an analyst at UBS Group AG in Singapore, said in a Bloomberg TV interview. “ We’ve put it on the radar, we’ll take a bit of time, and then we’ll look at it on a more serious note as we get into the third quarter.”