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United Plantations (UPL MK) is one of the best-managed oil palm plantation companies in the world.
With most of its estates in the Malaysian state of Perak, United Plantations has production yields per tonne far above its Malaysian peers. And thanks to vertical integration, it has become a low-cost producer with cost per tonne at the lower end of the industry. Operational excellence has enabled United Plantations to earn a 30%+ operating margin in most of its recent history.
The company’s corporate governance track record and sustainability ratings are excellent. Few related party transactions, limited M&A, stable share count and a generous dividend policy.
Real assets tend to serve as inflation hedges during periods of high inflation. Judging from money supply indicators, budget deficits across the world and earnings call commentary, it looks like inflation pressures are building yet again. Plantation companies should help preserve purchasing power just as well as any other real asset.
Prices for crude palm oil has shot up in the past few quarters thanks to the following factors:
- Rising global inflation
- A sharp increase in Indonesia’s export tax levy
- Chinese stockpiling
- Malaysian crude palm oil stocks have reached critically low levels
While it is difficult to say how long crude palm oil prices will remain at the current elevated levels, United Plantations’ management is predicting above-MYR 2,000/tonne prices to persist for years, creating windfall profits for the company. United Plantation’s share price has barely reacted - trading in the exact same range as over the past ten years despite a weaker exchange rate. Insiders have recently acquired over 150,000 shares at similar prices as today.
Assuming valuation multiples of P/E 10x and EV/EBIT 8x, the theoretical upside to intrinsic value is calculated as +49%, on top of 6% yearly rising dividends.
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Disclaimer: Asian Century Stocks uses information sources believed to be reliable, but their accuracy cannot be guaranteed. The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. You are advised to discuss your investment options with your financial advisers. Consult your financial adviser to understand whether any investment is suitable for your specific needs. I may from time to time have positions in the securities covered in the articles on this website. Full disclosure: I do not hold a position in United Plantations at the time of publishing this article. This is disclosure and not a recommendation to buy or sell.
