by Koon Yew Yin

As Warren Buffet said in 1985 that he had not seen the trend towards value investing in the 35 years he had practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult.

Although in Malaysia we do not have such companies like McDonald’s, Gillette, Coco Cola and other companies, which can produce sustainable profit due to their long term competitive advantage in the market, we have oil palm plantation companies.

If you look at the world map, you will notice two small countries – Indonesia and Malaysia. These two small countries produce about 90% of the total world palm oil, which forms a significant portion of all the eatable oil. Fortunately for us, both China and India, our largest buyers, cannot grow oil palms. As both their population and wealth increases they will continue to buy more and more palm oil from us. As a result, reasonably well managed plantation companies will enjoy sustainable profit growth which is the most important criterion for share selection.

Statistics show that due to population and wealth growth, the world requires about an additional 6 million tons of eatable oil per year. The demand for palm oil will continue to increase and the price of palm oil will also continue to rise over long term. However, like all commodity prices, palm oil price also moves in cycle and serious investors should not worry by its price fluctuation.

Plantation companies usually have acquired their land long time ago and land always appreciates in value. Moreover, oil palms will start to produce fruits after 4 years of planting and will continue to produce fruits for the next 20 years. The average production cost for a ton of crude palm oil is about Rm 1,300 and plantation companies are still making good profit even at today depressed price of about Rm 2,400 a ton.

Most plantation companies have very strong cash flow and if they do not keep buying more land to expand their plantation, they should be cash rich.

Could Malaysia biodiesel be the game changer for CPO price?

A few weeks ago, our Plantations Minister said that the government was pushing ahead with the full implementation of B10 in Malaysia by June 2014 which means that 10% of biodeiesel will be added to the fossil diesel. This could raise palm oil usage in Malaysia and help improve Malaysia’s social responsibility and its image. The Minister also said that Malaysia’s top five largest planters are committed to using biodiesel in their vehicles. This will be positive for CPO prices in 2014 as it will help raise palm oil usage in Malaysia.

As you know the current price of palm oil is depressed and almost all plantation share prices are also depressed. Moreover, investors are generally fearful of the coming general election and would prefer to sell than buy shares. This creates a good buying opportunity for serious investors.

The most undervalued share I know

There are many famous cash rich plantation companies but they are usually fully valued. Of course, it is very safe to buy them but I prefer to buy undervalued shares and take some calculated risk to earn exceptional profit.

On 19th March 2012, UOB Kay Hian published a report on Tradewinds Plantation (TWSP). The salient points are:
a) TWSP is the sixth-largest plantation company in Malaysia by planted area. Only six listed plantation companies in Malaysia have a planted area of over 90,000ha each.

b) Its FFB production to grow at 3-year CAGR of 13.4%. Fresh fruit bunch (FFB) production is expected to grow 12-15% in 2012-14, higher than industry growth of 5-8%. The strong production growth will be supported by: a) 11% pa increase in mature area for the next four years, b) 20% of young areas to provide strong double-digit growth, and c) yield improvement in its prime areas (49% of planted areas).

c) It is a hidden gem. All TWSP’s land is within Malaysia. Given the scarcity of land in Malaysia, its land would be more valuable than similar land in Indonesia. At the current plantation land market price, Tradewinds’ RNAV would be RM19.58, significantly higher than its current share price.

With its FFB production increases by 13% (compound annual growth rate) and its recent acquisition, TWSP has more planted land and FFB production than Genting Plantation.

Basing on the closing share price on 21th Feb 2013 the market capitalisation of TWSP is Rm 4.42 X 529 million issued shares = Rm 2,338 million and Genting Plant is Rm 8.42 X 759 million issued shares = Rm 6,390 million.

That is why the controlling shareholders want to buy up all TWSP shares that they do not own. Under the takeover code, they cannot do it because I have accumulated sufficient shares to block them.

If you decide to buy TWSP, I am not responsible for your profit or loss.