Univanich Palm Oil (5) – Final

Risks…

 

Obviously, weather is the main risk for Univanich and unfortunately it is beyond the company’s control. Severe drought can affect the average oil palm yields. The impact will be experienced in that drought year and up to two years after that as the oil palms produce fewer fruit bunches. The palm oil shortage crisis encountered early 2011 stemmed from the severe drought took place from December 2009 to May 2011.

World economic growth influenced the palm oil consumption. In recent years, strong economic growth in India and China drove the palm oil consumption. The opposite would also be true.

Changes in the legislation on mandatory use of biodiesel in diesel blends will impact the demand in crude palm oil. At the moment, Thailand is gearing up for a mandatory B5 biodiesel when the supply of feedstock is sufficient. Ministry of Energy announced in June to adopt B4 from July – September 2011 and will re-assessed the blending ratio after the feedstock supply level is reviewed later this year.

The planted area under the Chean Vanich concession of 14,241 rai is due to expire in 2013. The company would suffer loss if the Government decided not to renew all or part of the concession.

… Rewards

 

If your long term views are that the economic expansion in emerging economies leading by China and India will keep going well, oil price will remain stubbornly high, the uncertainty in Chean Vanich concession renewal will be resolved eventually and you have a stomach to see through unfavourable weather at some stages, Univanich might be a good candidate in your portfolio to ride on the energy-cum-food investment theme.

Although past financial performance showed wild fluctuation in net profit, the NPAT/FFB ratio was fairly constant at around 700 to 800 baht per tonne of FFB processed, barring the booming year of 2008 which saw the NPAT/FFB ratio reaching 1,665 baht/tonne.

With increasing in additional income from electricity generation, sales of seeds and seedlings, and CERs trading, the average NPAT/FFB ratio would improve. Meanwhile, the improvement in FFB production around Lamthap in the near future would lead Univanich to sanction the expansion of Lamthap factory to 90 t/h which would increase total FFB crushing capacity by one-third. Annual FFB processed would surpassed one million tonne mark and palm oil production could reach 200,000 tonnes per year.

On my base case’s assumption of NPAT/FFB of 1,000 Baht and annual FFB processed of 1,000,000 tonne, NPAT would be 1,000 MB. Given an expected dividend payout ratio of 80%, dividend paid per year would be 800 MB.

A simple PE ratio of 8 would value the company at 8,000 MB. While for the discounted dividend method assuming a WACC of 8% and no growth in dividend, the company would be worth 10,000 MB.

Given the current market capitalisation of 7,755 MB and barring severe deterioration in world economy, the company is fairly priced. The upside would come from strong CPO demand/price, production expansion and increase in revenues from other products.

 

 

Univanich Palm Oil (4)

Financial Performance

Table below summarises key financial metrics of Univanich in the last 4 years. Including also in the Table is the 2003 financial results, the year it was listed. Note that 2008 was the best year for Univanich and palm oil industry as a whole when CPO price rose over RM 4,000 per tonne in a response to crude oil price of $140 per barrel.

Let’s start with the revenue structure of Univanich. More than 90% of total revenues were derived from crude palm oil (CPO) and crude palm kernel oil (PKO) sales. The remaining was from sales of other products such as seeds, seedlings and electricity. Its products were sold domestically or exported through the deepwater seaport nearby its plants depending on the product price.

The annual production of CPO and PKO combined from 2007 to 2010 was relatively constant at approx 140,000 to 150,000 tonne, a 50% increase from 2003 production level as newly built Lamthap factory ramped up its production to its full capacity. Slight variations between 2007 and 2010 were mainly due to weather-related matter.

It is observed the volatility in the average selling price (ASP) of the combined CPO and PKO is high. In 2003, the ASP for combined CPO and PKO was 18.10 Baht/kg. It skyrocketed to a historic high of 39.04 Baht/kg in 2008 and settled at 29.46 Baht/kg in 2010. As a result there is no surprise to observe that its top lines were highly fluctuated as well.

The share of revenue from other products increased steadily from around 5% in 2003 to 8% in 2010 thanks to the ongoing investment in oil palm R&D and three biogas plants. In the Baht term, it rose from approx 100 MB to 343 MB or 18.8% compounded annual growth rate. In the future, added to its revenue would be the carbon credit trading of approx 100,000 Certified Emission Reduction credits (CERs) generated annually from its three biogas plants under the Clean Development Mechanism (CDM) scheme of the United Nations Framework Convention on Climate Change (UNFCCC). I expect the share of revenue from other products would continue to rise and this would help Univanich’s future performance insulated from the fluctuation in CPO price.

Its gross profit margin dwindled from 27.9% achieved in 2003 to 18.7% in 2010. This was attributable to the increase in FFB amount sourced from outside growers (80% to 85%). Although Univanich has constantly increased its oil palm plantation area, it is unable to keep pace with the increase in crushing capacity installed in 2001 and 2004 and still has to rely on FFB from growers nearby its plants. This trend is unlikely to change course and this would probably explain why Univanich invests so much in oil palm R&D. As it has to rely on outside growers, it would be better to supply them with high quality seeds and seedlings.

Its net profit margin declined from 20.4% in 2003 to 12.4% in 2010. This was caused by the reduction in GPM and increase in effective tax rate although offsetting by the improvement in cost control. The effective tax rate is expected to rise to 20% in 2011 because of the expiry of some BOI privileges.

	2003	2007	2008	2009	2010
Revenue (MB)
Domestic
CPO	1,003.25	849.14	1,410.20	2,528.08	2,507.28
PKO	35.07	0.00	28.46	265.42	164.20
Other Products	102.92	187.05	260.42	273.39	291.82
Subtotal-Domestic	1,141.24	1,036.19	1,699.08	3,066.89	2,963.30
Export
CPO	617.23	2,573.60	3,906.61	612.94	746.65
PKO	196.05	862.25	1,202.50	195.27	549.63
Other Products	0.00	25.41	27.64	91.73	51.22
Subtotal-Export	813.28	3,461.26	5,136.75	899.94	1,347.50
Total
CPO	1,620.48	3,422.74	5,316.81	3,141.02	3,253.93
PKO	231.12	862.25	1,230.96	460.69	713.83
Other Products	102.92	212.46	288.06	365.12	343.04
Total Sales	1,954.52	4,497.45	6,835.83	3,966.83	4,310.80
Other Revenues	4.67	8.93	17.99	21.42	18.16
Total Revenue	1,959.19	4,506.38	6,853.82	3,988.25	4,328.96
Cost of Sales	1,409.10	3,819.57	5,084.60	3,147.77	3,505.73
Selling Expenses	n/a	n/a	103.76	101.14	91.53
Administrative Expenses	n/a	n/a	57.66	36.23	52.03
Mgmt Benefit Expenses	n/a	n/a	46.52	39.00	41.12
Total Expenses	134.52	158.36	207.94	176.37	184.68
EBIT	415.57	528.45	1,561.28	664.11	638.55
Finance Cost	0.99	0.00	0.00	0.00	0.00
Income Tax	14.38	23.28	116.62	83.66	102.00
NPAT	400.20	505.17	1,444.66	580.45	536.55
Outstanding shares	94.00	94.00	94.00	94.00	94.00
EPS (Baht)	4.26	5.37	15.37	6.18	5.71
Amortisation		13.77	14.53	14.26	13.12
Depreciation	71.27	96.98	101.57	121.99	143.18
Total CAPEX	96.00	163.82	218.58	245.43	103.88
Free Cash Flow	375.47	452.10	1,342.18	471.27	588.97
FCF/shares (Baht)	3.99	4.81	14.28	5.01	6.27
DPS	3.50	4.00	11.50	4.50	4.50
Dividends	329.00	376.00	1,081.00	423.00	423.00
Dividend payout ratio	82%	74%	75%	73%	79%
Margins (%)
Export/Total Sales	41.6%	77.0%	75.1%	22.7%	31.3%
Gross Profit Margin	27.9%	15.1%	25.6%	20.6%	18.7%
NPAT Margin	20.4%	11.2%	21.1%	14.6%	12.4%
Expenses/Sales	6.9%	3.5%	3.0%	4.4%	4.3%
Tax Rate	3.5%	4.4%	7.5%	12.6%	16.0%
Production
FFB Processed Capacity (t/h)	90	135	135	135	135
Actual FFB Processed (t)	506,806	687,212	867,593	792,250	753,897
Utilisation Rate (%)	67.0%	60.6%	76.5%	69.9%	66.5%
PK Processed Capacity (t/h)	5	8	8	8	8
Palm Kernel Produced (t)	28,817	38,057	48,120	43,162	40,152
Utilisation Rate (%)	68.6%	56.6%	71.6%	64.2%	59.8%
CPO+PKO Production (t)	102,300	133,600	167,700	148,400	134,700
Oil Extraction Rate (%)	20.2%	19.4%	19.3%	18.7%	17.9%
Profitability
CPO+PKO ASP (THB/kg)	18.10	32.07	39.04	24.27	29.46
CPO+PKO Sales/FFB (THB/t)	3,653	6,235	7,547	4,546	5,263
NPAT/FFB (THB/t)	790	735	1,665	733	712

Book : The Economics of Food

During my trip back to Bangkok early 2011, I bought this fabulous book, The Economics of Food – How Feeding and Fueling The Planet Affects Food Prices, but could only complete it recently. The book is written by Patrick Westhoff, the co-director of the Food and Agricultural Policy Research Institute at the University of Missouri, and published in 2010. Although majority of the contexts are about what happened during 2005-2009, it’s still a must read in order to understand various factors behind the up and down of food prices.