Indonesian Palm Oil Companies In 6 Charts

The year of 2019 was disastrous for palm oil companies. CPO fell to its lowest level for a long time. No one is an exception.

But, now that CPO has trended higher substantially, palm oil companies’ economic profit (EVA) profile will soon show dramatic change. One company is likely to have a much more improvements in economic profit than the rest. Can you guess who?

Based on my rough calculation, BWPT will score EVA momentum close to 20% by the end of this year. The rest of palm oil companies will likely score around 8-10%. That is a massive rate of wealth creation. I am quite convinced that we will see palm oil companies as star performers in driving shareholders’ return at least in this year.

Just a year ago, palm oil companies ranked at the bottom in terms of profitability as measured by EVA margin. A great reversal indeed.

Interestingly enough, the reason why I expect BWPT to gain the most from rising CPO price is because BWPT profitability (as measured in EVA margin) is the worst by a wide margin. There is a lot of value driver levers which are pulled when CPO rises. I have given long explanation for this in prior posts about BWPT.

One key of substantial improvement in EVA Margin is definitely gross margin. Gross margin, in turn, is driven mostly by CPO price. Right now, CPO price is near at the upper level of 2016-2017.

That was the periods when gross margin of palm oil companies is around 20%. That return of gross margin is one key assumption behind the first EVA chart. And I might say that it is less of an assumption, and more of stating a fact, because CPO price is already there!

One other key factor is the value lever that is pulled when palm oil companies stop expanding their plantations...which is exactly what they did for the last 4-5 years.

Now that they have stopped expanding their plantation lands (AALI and SSMS are expanding their investments in affiliated companies), higher CPO price will result in higher sales for each of their plantations, and that means higher productivity. Unlike most traditional financial metrics, this higher productivity is elegantly captured in EVA. BWPT stands to gain the most from this ‘hidden’ value lever.

Disclaimer: While I try my best to be objective in all of EVA Briefs, readers should know that I have ownership in palm oil stocks.

PS:

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Climate Awareness

An article as good as the one BBC made is worth to mention more than once. Here is an interesting graphic of top 10 carbon emitters. Indonesia is on the list. A Substantial portion of carbon emission here is due to burning coal for electricity, deforestation by burning for paper products (some years back when palm oil plantation expanded massively, it was them), and transportation.

Source: BBC