Palm oil can be found almost everywhere in our daily lives; it is found in dog food, cereal, shampoo, and biodiesel. The palm fruit can be divided into two parts: palm oil is obtained from the outer flesh of the fruit, while palm kernel oil can be extracted from the kernel.
In this article, I will cover a medium-sized plantation group in Malaysia of Danish origin — United Plantations Berhad (UP). UP was set up in and is based in Perak, Malaysia. It cultivates palm oil and coconuts. It is also involved in downstream activities such as edible oil refining and the production and packaging of specialty fats. Its landbank of about 51,000 hectares is spread over Malaysia (80%) and Indonesia (20%).
Interestingly, as shown in the picture above, UP’s oil palm plantations in Malaysia are equipped with a light railway network to collect and transport fruits from its fields to its mills.
Here are 12 things to know about United Plantations before you invest:
1. UP considers oil palms of less than four years in age as immature. These immature trees will still bear some fruit, but it may not be as economical for UP to deploy resources to harvest them. Mature palms between 4-25 years old are prime for harvest, while those above 25 years of age and above are replanted. Replanting is planned and executed consistently to ensure some trees will still bear fruit while others are replanted. Also, yields decline when trees are too old and too tall to be harvested. Besides replanting, laboratory research and the selection of planting materials need to be done right from the beginning to ensure sustainable yield in the years to come. Ninety percent of UP’s oil palms are mature, and the rest immature at less than four years old.
2. Throughout the years, UP sold its non-core businesses to focus on plantation activities. UP is mainly led by two directors from the Bek-Nielsen family that collectively owns about a 48.7% stake in the company. Below is a list of disposals conducted by UP over the years:
| Company | Country of Incorporation | Business Activities | Year of Disposal |
|---|---|---|---|
| Maritex AS | Norway | Produce marine products such as canned cod liver and Omega-3 oils | 2003 |
| United Plantations (Australia) Pty. Ltd. | Australia | Dry land farming and produces wheat | 2003 (liquidation) |
| UniOleon Sdn. Bhd. | Malaysia | Produce, market, and distribute sustainable palm oil based food emulsifiers | 2015 |
3. UP has also undertaken some acquisitions over the years. The most recent deal was the acquisition of 3,642 hectares of land from Pinehill Pacific Berhad at RM414 million in 2019. As a result, UP’s cash reduced from RM915.8 million in 2018 to RM459.4 million in 2019. The newly acquired land is located near UP’s existing plantations in Perak.
4. Over the past 19 years, revenue and net profit has increased at a compounded annual growth rate of 7.8% and 13.7% respectively. In 2019, revenue decreased 10.1% to RM1.2 billion and net profit declined by 23.6% to RM248.7 million year-on-year because of low crude palm oil (CPO) and palm kernel (PK) prices. UP’s revenue was also affected by low CPO prices in 2001 and 2009. In 2013, UP was hit by a double whammy of low CPO and PK output as well as low CPO prices.
Source: United Plantations annual reports
Overall, UP has performed well financially over the past 19 years. The company has averaged a net profit margin of 20.6% and RM200.3 million in free cash flow annually. It also has nearly no debt and had a net cash position of RM459.3 million in 2019.
5. The palm oil refinement segment generated more revenue in 2019 but has a lower EBIT margin compared to the plantations segment.
| Segment | 2019 Revenue | 2019 EBIT | 2019 EBIT Margin |
|---|---|---|---|
| Plantations | RM392.5 million (33.5%) | RM256.5 million | 36.6% |
| Palm Oil Refining | RM779.0 million (66.4%) | RM71.4 million | 9.2% |
| Other | RM1.5 million (0.1%) | -RM0.5 million | -31.7% |
Source: United Plantations 2019 annual report
6. In 2019, UP generated half of its revenue from Malaysia and about 20.6% from Europe. This exposes UP to geographic risk as the European Union recently decided to ban palm oil from being qualified as part of its renewable transport target.
Source: United Plantations 2019 annual report
7. CPO prices fluctuate. It can surge on the outbreak of diseases (e.g. African swine flu in China) and dwindling palm oil inventory due to a drought. At the same time, CPO prices may decline on the back of increased yield and production. It is also affected by the prices of alternative oils like soybean oil. As a standard industrial practice, UP hedges its exposure to the fluctuation of CPO prices via commodity futures contracts, which makes the relationship between CPO prices and the supply-and-demand mechanism even less straightforward. Furthermore, UP faces a customer concentration risk where 50.4% of its revenue in 2019 came from one major customer in the palm oil refining segment.
8. The palm oil industry is plagued with labour shortages amidst increasing labour costs. UP estimated that the oil palm plantations in Malaysia could increase its fresh fruit bunches (FFB) yield by at least 0.5 MT/ha should there be sufficient guest workers. UP [U16] also faces competition in coconut imports particularly from Indonesia as the cost of production there is lower.
9. Compared to its larger peers, UP took the lead in terms of FFB yield, oil extraction rate, and average CPO yield, which is impressive. UP’s ROE over the past 19 years averaged at 11.2%.
| Company | FFB Yield (MT/ha) | Oil Extraction Rate | Kernel Extraction Rate | Average CPO Yield (MT/ha) |
|---|---|---|---|---|
| UP (2019) | 25.9 | 22.0% | 4.5% | 5.7 |
| IOI Group (2019) | 23.0* | 21.4% | 4.7% | <4.0* |
| Kuala Lumpur Kepong Berhad (2019) | 22.4* | 21.9% | 4.2% | 4.9* |
| Sime Darby Plantation Berhad (2018) | 20.5* | 21.0% | 5.2% | 5.3 |
*Per mature hectare. Source: 2019 annual report
10. Demand for palm oil will continue to increase as the Malaysian and Indonesian governments push for more palm oil content in diesel. In Malaysia, B10 and B7 biodiesel were released in 2019 for the transportation and industrial sectors. B20 biodiesel with higher palm oil blend is currently rolled out in stages with the plan to cover the entire country by 2021. In Indonesia, B30 biodiesel was launched in December 2019 and road tests for B40 biodiesel are already underway before B40 biodiesel is released in 2021.
11. Palm oil is the most widely consumed vegetable oil in the world. Its consumption is expected to increase in the future.
Source: Statista
12. Dividend per share has increased over the past 19 years. I would treat the special dividend as part of the ordinary dividend as UP has been distributing a special dividend since 2008. The average dividend payout ratio stood at 88.1%, which indicates the dividend payout is sustainable.
Source: United Plantations annual reports
The fifth perspective
In general, the palm oil industry has many moving parts and is not a straightforward industry to understand. United Plantations is one of the palm oil players that is more efficient and generates more returns for shareholders. If you want to have a pie of the palm oil industry, UP could be a starting point.
