EVA Brief: BWPT (PT Eagle High Plantation Tbk)

Let’s do another round of review because I am considering to add another round in this stock. This time I’ll bring AALI in the picture for a specific reason.

First thing first, it’s time to look some EVA facts. I calculate LTM (last twelve months) for comparisons. From a quick glance, EVA in Q1 2019 was indeed worse than Q1 2018. But, there is no change from the previous quarter (Q4 2018).

This is not good because I expect EVA to rise throughout this year even without a rise in palm oil price. Well, palm oil has been going nowhere for sometime now. So certainly, this is not good. But, should I worry? Is this an opportunity or danger?

What worries me the most is that management makes some major blunders. To remind you, I view that the major reason why BWPT share price is in this bad shape, trading near IDR 100/share ever since 2015 was because of major blunder when they made some major land acquisitions back in 2014 when palm oil price was still very high. This huge blunder is the major reason why its EVA is spectacularly negative.

But, my point is, despite that huge blunder, which could wipe out this company when palm oil price plummeted, investors still support BWPT since then which makes it 5 years now. So, in my opinion, if there is no major blunder, then there is no good reason why investors would drop their supports. If there is no major blunder, then this is only a matter of time before EVA would grow spectacularly when CPO rises.

With that being said, is there a major blunder made by management? I am asking if there is any sign that BWPT financial performance drops because of mistakes made by management. This is where bringing AALI brings added insight.

Let’s not mince words now. Q1 2019 performance was suck. The first thing I want to know is whether my original thesis still hold. Let me repeat. The major reason why EVA would rise even without an increase in CPO price (clearly even more so with increasing CPO price) is because BWPT does not have to invest big (which is in its land) to enjoy its growing harvest. In EVA terms, that means I want to see at least the charge of fixed assets does not make EVA margin worse. The fact shows it is so. Fixed asset charge as a percentage of sales is the same in Q1 2019 as it was in Q4 2018. It is a relief.

The bad news comes from NOPAT margin, which is only a small part of EVA margin component for BWPT. But it is still important because it is the major reason why recent EVA performance slips from Q1 2018. The main culprit for NOPAT margin decline is the decline in gross margin.

The decline in gross margin, in turn, is due to rising costs of raw materials and harvesting costs. Is there a blunder here? Did management do something that is really value destructive by choice? By comparing with AALI, there is a common theme here. It turns out AALI experienced the same rise in COGS. Both companies experienced about the same 5% rise of COGS during the same period. That is hardly a coincidence. The rise in COGS is affecting the whole palm oil industry.

Q1 2019 growth (yoy)

Sales: BWPT (1.3%) vs AALI (-4.8%)

COGS: BWPT (5.4%) vs AALI (5.4%)

Conclusion

So, while the numbers are not pleasing, I find that there is no reason to panic. The decline in EVA is felt across the entire industry because of rising COGS. Apparently, from the news I read, I sense that there is no panic from the management both in BWPT and AALI regarding the rise in COGS. As a practical point of view, since there is almost no change in LTM Q1 2019 EVA compared to Q4 2018, I agree that there is no major development worth worrying...yet.

Here is EVA comparison between BWPT and AALI. They tend to move in the same direction.