Bumitama (SGX: P8Z) share price is at an all-time low of about $0.605 per share again since its IPO in 2012. Is this an opportunity to get into this palm oil agricultural play, touted to be the most profitable amongst its peers?
About Palm Oil Industry
For those of you who may not know too much about the palm oil supply chain, a good way to understand is this flow chart:
The whole supply chain starts from the plantation owners planting and harvesting the fruits called the Fresh Fruit Bunch (FFB), and normally the fruits are harvested twice a month. There are usually collection centres collecting the FFB from the smaller plantation owners and then sending to the mills. At the mills, the FFB is processed and crude palm oil (CPO) and palm kernel (PK) extracted to be sent to the refineries. From there, there are actually many uses of CPO and PK, ranging from biodiesel, cooking oil, biscuits, soaps to chocolates.
Bumitama Agri Ltd has plantations in Indonesia and has a number of mills processing the FFB into CPO and PK.
Bumitama FFB and CPO Production
You can see that Bumitama has been increasing their FFB and CPO outputs with CAGR of 13.6% and 13.9% from 2014 to 2018.
Unfortunately, when translated into top line, the growth in revenue in IDR dollar terms is less impressive. When converted to SGD, there was actually a slight decline in revenue in FY 2018 compared to FY 2017.
The eps of Bumitama in SGD terms since IPO just isn’t going anywhere. This has resulted in not so sterling share price performance.
There are a few types of businesses categorized as follows:
- High Growth, with growth > 20%
- Stalwarts, with growth > 10% < 20%
- Slow Growth, with growth < 10%
- Asset Plays
Bumitama is probably best described as a cyclical company, highly dependent on CPO commodity prices. CPO prices dropped to three-year lows in November and December 2018 and this is certainly not good for Bumitama and its bigger peers like First Resources and Golden Agri Resources. Let’s take a look at the CPO price trend. Prices have picked up slightly in recent months but still very depressed. There is forecast that second half of 2019 hopefully will augur well for the palm oil industry with further price recovery and higher demand.
Let’s continue exploring aspects of Bumitama’s financial performance.
With all the challenges, 2018 FCF/revenue is good at 10%, net margin is decent at 13%, ROE is 14% while ROA is 6.63%. I won’t fault this set of numbers.
Debt to equity is slightly high at 0.672 while interest coverage is probably alright at 8.7 times. I would have hoped for better numbers but I don’t think there is a huge concern about its debt level.
Bumitama is involved in buying back shares though the amount is very small. It is interesting to note that the share buyback was at an average price of $0.674 which may mean that at that price, the management feels it is undervalued.
Bumitama’s Major Shareholders
You should also note that the CEO and his family owns 43.11% of the company through Wellpoint Pacific Holdings while IOI, a major Palm Oil player in Malaysia, effectively owns 30.79% through Oakbridge Investments. I am comfortable with this as IOI will play a check and balance sitting on the board while the CEO’s family would not do anything untoward that will adversely affect the share price of this company.
I typically do not invest in a cyclical business as you need to really know the industry fairly well. In this instance, I do have some knowledge of the industry and I would say that the palm oil industry would probably last for a few more decades at least. There are challenges from environmental lobbyists against the use of palm oil versus other vegetable oils, the costs involved to go for sustainable palm oil certifications, the political pressures from certain countries as well as fluctuations in CPO prices purely from a supply and demand perspective. It does not help that trade tensions seem to have caused a global economic slowdown. China is a major consumer of palm oil and a slowdown there will definitely impact the whole industry.
Regardless of the headwinds, what’s my valuation of Bumitama? It is difficult to carry out a valuation of a cyclical business. I made some assumptions and using discounted cash flow method, I value it at between $0.50 to $0.60 at current CPO prices, while there should be some upside as conditions improve.
At $0.60 share price, the current dividend yield is 4.5% while the dividend payout ratio is just slightly above 50%. I believe the downside should be quite limited. However, I do feel that Q2 2019 results will still come in ugly, and I might want to observe further before I come to an investment decision. Alternatively, I might just invest an initial amount first.
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