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Time for Oil Palm Plantation Stocks?

Now we’re at the end of April, and that means all the public companies will release their financial statements for the period of first quarter of 2014. In fact, up to this writing, there are at least three companies that has released the statements. They are Bank Danamon (BDMN), Bank Mutiara (BCIC), and Astra Agro Lestari (AALI). The interesting one is AALI, which recorded Rp810 billion (about US$ 80 million) of net profit, or jump more than doubled over the same period in 2013. On the other hand, if we glance at the price of crude palm oil (CPO) on Malaysia Stock Exchange, the figure has been stable at RM2,600 per ton, after it was dropped to RM2,200 per ton. Time for oil palm plantation stocks to rebound?

AALI, as you know, is the third-largest oil palm plantation company on the Stock Exchange after Salim Ivomas Pratama (SIMP), and Sinarmas Agro (SMAR). AALI is a blue chip stock with liquid trading volume. Meanwhile, if viewed from its fundamental qualities, AALI is the best stock in the palm oil sector, with consistent financial performance throughout decade, including its profit only decreased slightly in 2013 when the price of CPO falls. It’s no wonder, because AALI is managed by one of the finest business group in Indonesia, the Astra Group. In this 2014, AALI has successfully increase its net profit again, and the trend should be good considering the price of CPO continued to rise in recent times, but is still far below its peak in 2011, which was RM4,500 per tonne.

Unfortunately with PER and PBV that reached 14.2 and 4.2 times respectively at the price of Rp28,350 per share, then AALI is quite expensive. It's a bit late if you force yourself to buy the stock at current price. But considering that the palm oil sector in general began to recover, then there may be chances in other palm oil stocks.

Then how do you know that the sector has recovered? Well, it could be seen from the trend of the world’s CPO price. In early 2009, based on data from the Rotterdam Exchange, the price was at US$ 562 per tonne. Then, in just two years, it soared to US$ 1,300 per ton in February 2011, and that's why the oil palm plantation sector had its glory in 2011. But after that, the price continued to fall until finally stopped at US$ 770 per ton at the end of 2012.

The trend of world's CPO price, and AALI' CPO price

Then throughout the year of 2013, though only slowly, the price of CPO started to rise again and now it’s been steady at US$ 900 per ton. So we can conclude that the decline of CPO price that occurred during the year 2011 - 2012 was not due to an oversupply, the existence of better substitution commodities, or whatever the reasons, but simply because the price had rose too much in the earlier years. That's it (bear in mind that investing is simple if you make it so). At the end, the world’s needs for cooking oil and various other derivative products from CPO, will never go down.

During the year 2013, the majority of oil palm plantation companies in the Stock Exchange still recorded an increasing performance if viewed from the fact that their volume of CPO sales are still rising, or at least if we look at the operational data of AALI, SIMP, and PP London Sumatra/LSIP (because only the three companies that released their operational data), but the lower price of CPO caused them to fail in increaisng their net profit.

And in 2014, if we refer at the data from AALI, the average CPO price during January - February was Rp8,829 per kilogram, jumped 39.0% over the same period of the previous year! However, bear in mind that in early 2013, the price of CPO was at its bottom. But clearly AALI successfully made a significant increase in profit in the first quarter of 2014, because on the other hand, the company's CPO sales volume (and its derivatives, such as olein and stearin) still continues to rise as usual. Including the selling price of palm kernel oil also rose significantly, from Rp2,700 in 2013 to Rp5,600 per kilogram at the moment. Of revenue amounting to Rp3.7 trillion at the First Quarter of 2014, Rp448 billion of which came from the sale of palm kernel oil.

Now, if we trying to remember, in 2011 almost all oil palm plantation companies ranging from AALI, LSIP, SMAR, Sampoerna Agro (SGRO), Gozco Plantations (GZCO), until Tunas Baru Lampung (TBLA), enjoyed big profit that is in line with the rise in CPO price. This means that the performance of the entire oil palm plantation companies in IDX (except Bakrie Sumatera Plantations/UNSP, of course) are in the same line. So assuming that not only AALI, but other oil palm companies will also make a significant increase in performance in the first quarter of 2014, then your task is to find an undervalue stocks only.

Then, to help you to make an initial screening, the following is the latest data of PBV from the fourteen stocks of oil palm plantations in IDX (outside AALI), based on their equity position as at December 31, 2013.

Sawit Sumbermas Sarana
Dharma Satya Nusantara
Sinarmas Agro
BW Plantation
PP London Sumatra
Provident Agro
Sampoerna Agro
Austindo Nusantara Jaya
Tunas Baru Lampung
Jaya Agra Wattie
Salim Ivomas Pratama
Multi Agro Gemilang
Gozco Plantations
Bakrie Sumatera Plantations

  1. The PBV is calculated based on the position of net asset/equity outside the non-controlling interest.
  2. ANJT presented its financial statements in U.S. Dollars, so its PBV is calculated based on the assumption that the exchange rate was Rp11,000 per U.S. Dollar.
  3. Especially for MAGP, PBV is calculated based on the equity position of the company as at September 30, 2013, because the company has not released its financial statements for the period of full year 2013.
Based on the table above, then you will understand why I said that AALI was pricey, considering its PBV reaches 4.2 times, the second-highest compared to the PBV of all other stocks above. Okay, AALI’ quality fundamentals are probably make it deserves a premium price, but still, I am sure that unless you can buy this AALI at a much lower price than the current, then there are other palm oil stocks that offer more gains. Important thing is that you choose the stocks with good fundamentals.

However, when it was mentioned that the majority of oil palm plantation companies will make a significant increase in financial performance in the first quarter of 2014 as well as AALI, then it's just an assumption. In addition, in the last three years there are a lot of new palm oil stocks in the exchange that I myself has not analyzed them, whether they were also made big profit in 2011 or not. Just to be sure, let's wait until the beginning of May where they were all supposed to have released their financial statements respectively.

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