The world is on a commodities rally where prices of raw materials have increased by double digits over a 1-year period. This is largely due to the economic recovery post COVID as well as monetary accommodative environment.
Besides the oil rally, there is another produce that is abundant in South East Asia which has rallied. On a one year basis, the price of palm oil has grown by at least 40%. Hence I took a view of searching for SG-listed companies in the palm oil planation business; two businesses appeared - Golden Agri Resources (GAR) and Bumitama Agri (BA). Their business is simple, grow palm fruits, extract the oil and sell them.
Both companies have seen profit growths and I expect with the higher CPO prices, the revenue recorded will remain elevated which in turn means higher profits.
P/E Ratio- In terms of P/E, GAR is selling a high P/E due to its tax expense last year. However, this year's Q1 profits is already higher than the entire FY reported earnings, hence i suspect the tax expense is also a one-off line item. Hence, GAR is likely trading at a forward single Digit P/E. BA on the other hand, has consistently been trading at a single digit P/E over the past year. This is something interesting as I thought markets would price in future earnings given the rising CPO prices.
Plantation Age- Both companies have a relatively large proportion of mature palm oil plantation with GAR having a slightly older plantation age. However given that many of their plantation are in the peak oil yield stage; I am not sure why the market is ascribing such a low valuation.
Forward Sales (hedging)- It seems BA has done quite badly in hedging because it hedged some of its future palm oil at a low price and had to be pay the difference for the recent hike in Indonesia export levy. This could explain why profits are not growing as fast as GAR.
Indonesia Export Levy- Indonesia has increased its export levy. A risk is another higher than proportion hike especially when the government needs money to rebuild post COVID
CPO prices fall- It's the end of the commodities cycle and CPO prices falls back.
All in all, I think the commodities rally will still continue and am interested in investing in at least one otherwise both of these companies. Current CPO prices are at US$3500 per ton and I expect levels to be maintained. This will ensure FY21 profits will be higher than FY20's profits when CPO prices were at US$2500/ton.
I am not invested in any of them but will be taking a further look at weighing their plantation age vs their forward sales (hedging) strategy