Looking to invest in plantations? Let’s go over these key considerations to help you get started.

Plantation companies are a big part of the Malaysian stock market. With the many big names like Sime Darby, Kuala Lumpur Kepong, Genting, and IOI Plantation, many investors in Malaysia have been keeping a keen eye on this sector for years.

While undeniably the tech sector is gaining strides worldwide, the agriculture sector is still relevant. In Malaysia, the plantations still arrest the attention of investors. This is particularly true with the palm oil (or oil palm) industry. Other plantation industries that are available include rubber, timber, durian, tea, and others.

Note: Palm oil is the vegetable oil extracted from the fruit of the oil palm, which is a type of tree.

This article will explore what are the key considerations you should have when investing in plantation companies. To simplify explanations, we will use the palm oil industry as our main example, but of course you can apply these considerations to the other plantations as well.

#1: Determine the Land Size of the Company

The important thing you need to know about a plantation company is the amount of land it has. This will determine how much output it can produce, and subsequently how much revenue and profits it can generate too. A plantation company ultimately needs land to plant its crops and land is the most important capital that the company invests in.

Narrowing down to the palm oil context, this is especially important as oil palms require vast amounts of land to be planted on. In 2020, mature palm oil plantations alone occupied 5.2 million hectares.

Publicly-listed plantation companies normally disclose how much land they have. It is important to know how much land is planted and unplanted, as a higher percentage of planted lands means the company is fully utilising the land to produce as many crops as possible.

#2: Does the Company have Upstream or Downstream Businesses?

It is of course better to have both upstream and downstream businesses for a plantation company. Upstream business is focused more on producing raw crops from the land, while downstream business is focused on refining the raw crops into higher value-added products and selling them to consumers.

The reason why you have to identify whether a plantation is focused on upstream or downstream business is that both businesses have their pros and cons.

An upstream plantation company has the advantage of making more money if prices are high for raw crops and commodities but suffers from low-profit margins due to their need to invest in a lot of land.

A downstream company has the advantage of selling higher-value products that have higher profit margins due to branding and marketing but that margin could be reduced if raw crops and materials prices increase.

#3: Analyse the Yield

Knowing the yield is an important metric to measure the performance of a plantation company. To further elaborate on this point, let’s go straight into palm oil to better understand how it works.

Fresh Fruit Bunch (FFB) yield is the measure to look out for when looking into palm oil plantations. FFB is the raw fruit of the palm oil tree and is converted into crude palm oil and crude kernel oil. Typically, a mature palm oil estate generates FFB yields of 18 to 30 tonnes per hectare in a given year.

Every palm oil plantation company will publish its FFB yield data on its quarterly and annual reports and there are different ways of looking at this. Companies with high FFB yields are preferred objectively as it means that they are efficient at producing FFB from their existing land.

However, you also need to look at the composition of mature and immature lands when looking at the FFB yield. It could be the case that the company has low FFB yields because it has higher amount of immature lands that could potentially generate higher yields in the future. You could start investing in them now to reap higher potential profits in the future.

#4: Determine Who The Company’s Customers Are

It is important to know where the company generates its revenue from as you have to consider also how its revenue will be affected by other countries.

If the company relies heavily on a few countries to generate its revenue, you need to conduct your due diligence on the demand coming from these countries. Any events happening in these countries could substantially reduce the revenue of the company.

Palm oil companies mainly export palm oil overseas and their biggest customers are China and India. Other notable countries that import palm oil from Malaysia include Netherlands, Pakistan, Philippines, Turkey, and the United States.

It is always best if the company diversifies and sells its palm oil to multiple countries, as it will not be heavily affected if sales to one country drop, such as what happened in 2020 with India’s boycott of Malaysian palm oil.

#5: Examine its Financial Performance

Finally, you should examine its historical financial performance. This shouldn’t be complicated. Look for the basics of the company such as revenue growth and profit margins. If you want to extend your research and analysis further, you can further examine its balance sheet and cash flow position by looking at how much debt it has and whether its total cash is enough to pay for its operations and debt obligations.

For revenue growth, the higher it is, the better. At the bare minimum, you need to look for a company that has consistently grew at a rate of 3% to 5% every year. Anything below that means that the company’s prospects are declining. In terms of profit margins, there are no hard and fast rules. Look for companies with steady profit margins of around 10% to 20%. If its margins are volatile (for example, it could be 30% this year, and 2% next year, this is volatile), it means that there are many uncertain elements inside the company and you should generally avoid that.

#6: Certification

Being a plantation company in today’s world isn’t easy as agricultural-based companies utilises a lot of natural resources such as land, soil, raw food products. With so many resources used, many people worry about whether plantation companies are sustainable.

Investors are increasingly leaning towards ESG (Environmental, Social, and Governance) investing. It’s no longer just about profit, but profit that needs to come from a sustainable base and has minimal impact on our environment.

For palm oil companies, there are two certifications, in general, you should look out for. Getting a Roundtable on Sustainable Palm Oil (RSPO) certification is considered the gold standard in the industry while getting a Malaysian Sustainable Palm Oil (MSPO) certification is considered decent also. These certifications are crucial as it ensures that the company is adhering to environmental and sustainability standards.

Conclusion

Investing in plantation companies in Malaysia is certainly an option for investors to look into. These 6 considerations will help you in determining the best way to start researching the various plantation industries before you invest in them.

 

Let us know in the comments below on what you think about plantation stocks.

 

You May Also Like