Wednesday, November 27, 2013

When the tide gets low, you know who is swimming naked

Warren Buffett used to say this and I like this particular quote by the oracle the best. It basically says that among the competitors in the industry, you only look for the best and during good times, it is hard to identify the best because everyone seems to be doing well. This happens to many of our Malaysian companies in several industries - among them oil and gas, banks, properties etc.

However, recently one industry seems to have some challenge i.e. the palm oil industry - and yet they are still enjoying good market price although it has dropped from RM3,100 to some RM2,300 per tonne.

In one of my early article during FGV's IPO, I was warning that yes FGV has one of the largest landbank among the palm oil guys but we do not really value the company based on that. What should be looked at is the efficiency in terms of processing and as what I have thought FGV is not one.

3Q13 results for FGV
The recent drop in palm oil price has not even reached a bad level and we know that economies will not stay positive all the time. But look at what FGV has suffered. Imagine, what would happen if palm oil price drops to below RM2,000? It won't happen? I don't know, but when other palm oil companies were just experiencing some 20% drop, FGV is suffering much worse.

The quote by Warren Buffett has its relevance for all industries and one is to take note as we are seeing many companies have been enjoying for a long time. Good times does not last forever.


Gark said...

FGV trees are mostly old, if I am not mistaken, >60% their trees are >25 years.

Older trees are less productive per ha and have low OER.Hence their CPO margin will be poor due to less CPO produced with the same cost. It will get uglier as the trees continue to age.

I am not surprised that FGV will perform poorly during poor CPO price. They seems to be milking their company and not provide sufficient capital to replant most of their crop. It is akin to running a factory but not providing capex until everything falls to pieces. You need USD 16.5k to replant 1 ha, so the built up cost is enormous.

It also explains why they are in such a hurry to list as well.

Gark said...

A mistake in the previous post.. it should be RM 16.5k per ha.

FGV have 344k ha, if they plan to replant even 10% of it will need capital of about 560 million RM.

Betronist said...

Very useful info Gark :)

How did you derive the RM16.5k p.h. replanting cost?

Gark said...

This based on average planting cost of other plantation between 12k-18k depending on location.

TDM's planting cost is ~16k as their estates are similar so i just use the cost.

If you want to estimate at lower end you can use 12k/ha. This cost includes clearing, manpower, sapling & fertilizer until the tree mature (5 years).

A responsible plantation will replant 3-4% of thier total landbank so they can replace older trees on a steady basis.

Apparent FGV has been delaying their replanting to show artificially higher profits..

felicity said...

Great stuff, not surprising though. most companies do that. that's why buying IPO companies is always dangerous - because companies raising funds or selling stakes would want the highest.

Latest story is the 7-Eleven

goh said...


Any comment on Rimbunan Sawit (RSAWIT) , its awfully been quiet.


Big Sea said...


Why are you interested in RSAWIT ?
RSAWIT has a lot of unplanted land but apart from that, it is not attractive at all ! If you value the land RSAWIT probably looks undervalue. However, land that are not making money is worthless. Investors buying RSAWIT would probably fall into a value trap !