BWPT 2019 Economic Profit Assessment

2019 full year result just came in. It is worse than 2018.

The only silver lining is that there is no new notable investment in fixed assets. In fact, it is declining a bit because they sold some machineries and vehicles.

The big thing is there is no more plantation expansion since 2014. BWPT has been letting its plantation to mature and do its wonders. (see previous analysis)

Palm oil production cycle:

0-3 years old = non-productive (immature); 6-12 years = increasing yield to peak level (mature); after: declining yield but could still producing until 30 years old.

The average age of BWPT trees is 11 years old now. That means there is still plenty of time before it becomes urgent to do re-plantation which means there is no need to make a new, big investment anytime soon.

Regardless of the production level, the position of no new investment is the value booster that would start to kick-in when CPO price starts to rise. That value driver is still there sleeping largely unnoticed.

The bad news aside from low CPO price is its fruit production. Its mature plantation production is not as good as it should be - for a reason that is impacting the whole agribusiness: rainfall.

The average rainfall (data in Kalimantan, based on company’s database) has been in a downtrend from for more than 4 years. After 2018 the average rainfall has been below 2.500 mm annually. A gain in plant production from maturity bonus has been muted ever since. It looks clear to me that rainfall below 2.500 mm is not sufficient to bring optimum fruit yield.

I have been expressing my concern for this trend in rainfall. As the earth getting warmer, El Nino will become more frequent. What is being called anomaly will become normal. We are already locking in more heating from current CO2 in the atmosphere.

As of this year, we have seen an increase in rainfall and BMKG sees El Nino as unlikely to happen this year. That should bring back growth in fruit.

From the company’s public data, it looks like the management is expecting a 7% increase fruit production from 2018 peak. That means the management sees 2019 as an anomaly.

If El Nino is still an extraordinary event, there should be more fruit growth to come. An old plantation like AALI produces 55% more fruits per hectare compared to an 11 years old BWPT plantation.

If BWPT plantation could be like AALI, that means it has the potential to produce 2,8 million tons palm fruits. At its recent peak in 2018, it produced 1,8 million tons.

Taking advantage of the company’s publicly available financial model, that means sales could reach to IDR 5,2 T which is 70% higher than 2018 level (IDR 3,1 T) if we use current CPO price @8.500/ton.

That is a pretty reliable mathematical exercise, only with one important caveat: if the weather could allow BWPT plantation to reach that point. So far, it has not been kind. To add, BWPT business would only have a break-even potential (making zero economic profit) if CPO price could break recent high.

Net-net, economic profit picture is likely to be like below in this year if there is not much change to the CPO price. EVA momentum in this projection is 20% (see also: other palm oil companies). That is a very high rate, often accompanied by a surge in stock price, regardless of its valuation. If CPO price is making a higher-high this year, the picture would be much better (see CPO chart analysis).

...Unless CPO follows crude oil. The correlation is not perfect, and I don't think it will.. but it is a good enough reason to merit caution.

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Climate Awareness

I am pleased to notice that Indonesian major newspapers are now making more frequent columns on climate change.

Speaking of El Nino, a new scientific research that "as early as mid-century, global warming could cause an ancient climate pattern similar to El Niño in the Indian Ocean to reawaken. It would throw weather further into disarray, particularly in places in the global south that depend on rainfed agriculture". This piece is being translated everywhere.

Read it full here.