Palming Palm Oil Profits
12/14/2010 12:43 pm EST
A London-listed operator of plantations in Papua New Guinea looks cheap given the soaring prices of its main product, writes Peter Shearlock in The IRS Report.
Next time you fill up a supermarket cart, check how many items contain palm oil. If your shopping includes soap, detergents, bread, pizzas, and other processed foods, you will probably see palm oil listed among the ingredients. Where only “vegetable oils” are listed, chances are that palm oil is among them.
The growth of demand for palm oil over the past decade has been dramatic. In part, that’s because of its newfound use as a feedstock for biodiesel. But it is the food industry worldwide that accounts for the lion's share of the near-50 million tons of the stuff currently being produced.
La Nina Pumps up Prices
According to the publication Oil World, global demand for eight key vegetable oils will exceed supply this year for the first time in eight years. A La Nina climate event has resulted in excessive rain in Indonesia and Malaysia, which produce 90% of the world palm oil crop. Estimates for production of soybean oil—a competitor to palm oil—have also been cut.
Given this backdrop, it is not surprising that the price of crude palm oil recently pushed back over the $1,100-per-ton mark. That compares with a pre-crisis high of close on $1,400 per ton in 2007 and a low of $435 in 2008.
While the shares of the world's leading palm oil producers have all performed strongly this year, one still stands out as offering real value: New Britain Palm Oil (London: NBPO). After a big acquisition earlier this year that expanded its plantations by about a half, it now has more than 75,000 hectares, or 185,000-plus acres, of plantations, largely in West New Britain, which is part of Papua New Guinea (PNG).
The Grower with the Greenest Thumb
NBPO is a high-quality producer in every sense. First, it is among the most efficient. The yield on plantations that have been within the company's ownership for any length of time is an industry-leading 28.4 tons per hectare. That compares with returns of less than 20 tons per hectare for the two most recent acquisitions. NBPO is also expected to become one of the most efficient upstream producers in the industry.
All told, NBPO is set to generate the highest earnings growth of any of the leading palm oil producers over the next few years. One reason is the company's position as the largest producer of certified sustainable, segregated and traceable, palm oil in the world. NBPO is reaping dividends from its investment in sustainable production.
In the first nine months of this year, NBPO lifted production by 22% and revenue and profits before tax by 49% and 42% respectively. The company has been making forward sales of palm oil at prices ranging between $820 and $863 a ton but is likely to achieve significantly more for the bulk of its 2011 output. It also produces a small amount of sugar, whose price has been generally strong in the past year.
Hidden Value on the Books
Despite this good news, NBPO has been trading at a discount to most of the big Malaysian producers. Macquarie recently lifted its price target to 933 pence, which compares with a current share price of 835p. Liberum Capital, NBPO's other broker, forecasts a rise in earnings from around 37p this year to 46p next and 52.5p in 2012. That puts the shares on a 2011 price/earnings ratio of 18.
However, the figures assume an average palm oil price of just $820 a ton next year. And NBPO shares are better value than these numbers would suggest.
The last accounts show net worth of around £330m, but taking the price per hectare paid for the last acquisition puts a value of well over £400m on the company's plantation land alone.
At the time of its latest acquisition, which was financed with around £130m of borrowings, the company said it was to suspend dividends for a year. They will recommence in the second half of next year. NBPO has about £170m of debt, which is easily manageable.
Clearly, much depends on the future price of palm oil. Demand from China and India, two of the biggest markets for palm oil, shows no sign of slackening. Western food producers are using more and more vegetable oils, palm oil included, and are being pressed to show that those oils are responsibly sourced.
The recent price action looks soundly based, while NBPO's credentials as a “green” producer leave it ideally positioned at the fastest-growing end of the market.