KUALA LUMPUR: Singapore-listed oil palm plantation companies such as First Resources Ltd and Bumitama Agri Ltd have been enjoying a good run in their share prices despite the general downtrend in crude palm oil (CPO) prices this year.

Ben Santoso, research analyst at DBS Vickers Securities in Jakarta, attributed the resilience in their share prices to their lower valuations compared with Malaysian oil palm plantation companies.

“Historically, Singapore-listed plantation companies have been trading at a lower valuation compared with their Malaysian counterparts. This is why there is greater upside for Singapore-listed plantation companies because it comes from a lower base compared with Malaysia’s plantation companies,” said Santoso.

Malaysian plantation companies have always traded at a premium valuation compared with their Singapore-listed counterparts.

On average, major Malaysian plantation companies are now trading at 17.66 times their forecast earnings, compared with only about 12 times for Singapore-listed palm oil producers.

Share prices of First Resources and Bumitama Agri increased by as much as 30.13% and 39.33% respectively as at last Friday’s market close. First Resources closed at S$1.97 (RM4.90), while Bumitama ended the day at S$1.05.

In comparison, major oil palm plantation companies in Malaysia and Singapore have been trading on a downward trend, more in line with CPO price movement.

Except for Sime Darby Bhd, whose share price has risen by 5.92% so far this year, other juggernauts such as Kuala Lumpur Kepong Bhd (KLK), IOI Corp Bhd have declined by 6.87% and 5.06% respectively.

Genting Plantations Bhd had risen 4.71% while newly-listed Felda Global Ventures Holdings Bhd had risen 4.4% since listing to RM4.75.

Sime Darby closed last Friday at RM9.65 while IOI ended at RM5.07; KLK and Genting Plantations settled at RM21.42 and RM8.97 respectively.

CPO prices have been on a downward trend this year due to growing inventories in top producers in Malaysia and Indonesia, compounded by lower demand from China and India.
CPO price for December delivery closed at RM2,415 per tonne last Friday, up by RM63 from the previous day. On a year-to-date (YTD) basis, the benchmark contract has lost 25.12%.

According to industry observers, the higher valuation for Malaysian plantation companies is due to the perception that they have a higher level of management expertise compared with Singapore-listed companies, many of which operate in Indonesia where operating risks are seen to be higher.

However, plantation companies based in Indonesia have higher growth potential, given the fact that there is still a lot of land for oil palm cultivation and their lower cost base compared with in Malaysia.

Nevertheless, Golden Agri Resources Ltd, which operates 457,000ha of oil palm plantations in Indonesia, has lost 11.03% of its share price value YTD.

“When investors decide to invest in a company, they don’t really look at where the company’s operation is. You can’t directly compare the prospect of a country with the prospect of a company,

“Just because Indonesia has ample land that can be utilised as oil palm plantations does not mean that oil palm planters there will have better growth prospect compared with those in Malaysia, for an example,” said Santoso.

He pointed out that PT Astra Agro Lestari, which is listed on the Indonesian Stock Exchange, has not performed in terms of its share price because the company has not shown a good growth potential compared with First Resources.

First Resources, founded in 1992, now manages 130,000ha of oil palm plantations in Indonesia. The average age of its palms is eight years, which is about the right age for high production of fresh fruit bunch (FFB).

Astra Agro on the other hand manages 266,706ha of plantations in Indonesia, with an average age profile of 14 years, which is at the tail end of the peak production cycle of an oil palm tree.

On the Malaysian side, the share price of Sime Darby has been quite resilient, despite the downside trend of CPO price.

The plantation-industrial conglomerate has been abuzz with a slew of big ticket projects, including the joint venture with Employees Provident Fund and S P Setia Bhd to acquire London’s Battersea Power Station for a commercial redevelopment of the iconic site.

On its plantation business, Sime Darby has been actively scouting for new areas. It is the only major listed plantation company in Southeast Asia to have ventured into oil palm cultivation in Africa, and is now looking at Latin America for landbank.

This article first appeared in The Edge Financial Daily on Oct 8, 2012.