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.