Bumitama Part 2.1

In my previous post in December 2015, I mentioned that I bought Bumitama at 0.745 and would share my analysis in the next post. This post is way overdue.

Today, Bumitama’s share price rose to 0.92 (+23.5% return in 3 months since I bought it). Like my previous First Resources trade, I didn’t expect such a return in short time. Again, it’s more luck than anything. Many palm oil players also rose in the past 3 months on the back of stronger CPO price (now at RM 2685/t vs RM 2350/t in Dec 2015)

Why I bought Bumitama at 0.745 in December 2015?

  • CPO rose in last quarter of 2015, and it’s reflected in the share price of First Resources (FR) and other palm oil players, but not in Bumitama’s. Bumitama, which has higher growth profile than FR, saw its share price falling back to near the bottom when CPO price dipped in August. This mispricing created a buying opportunity.
  • Bumitama had a bad Q2 production. Q3 production growth was back to ok, though not fantastic. As such, 9M performance suffered, and this could have scared investors. However, for people who understand Palm Oil sector, they will know that Bumitama has a very young plantation estate, and any drop in quarterly production is temporary. I didn’t expect Q4 production growth to come back so strong either (Q4 Internal FFB grew by 30% yoy). So, we can’t forecast the quarterly production, but, with some simple calculation, we should know that over the next few years, it will be growing at double digits. Like John Maynard Keynes said:

It is better to be roughly right than precisely wrong.

  • The drought in early 2015 could potentially affect the palm oil production one year later. Historically, that has happened several times. If this time is no exception, then this year’s production will be impacted, and that will push the CPO price higher, benefiting the upstream player like Bumitama the most. We can’t forecast weather and we shouldn’t. But, weather pattern and tree production does have some cause-effect, and we should use this to our advantage instead of ignoring it completely. As I mentioned in my earlier posts, if production does drop due to weather, it should be treated as an added bonus to our investment return.

Therefore, my decision to buy Bumitama was due to 1) market was ignoring Bumitama, 2) market lost confidence in Bumitama after one bad quarter, and 3) there was a potential rebound in CPO price, which could benefit Bumitama the most.

The first 2 reasons supported me to buy in dip. It’s not perfectly timed as the share price subsequently dropped futher to 0.66 in January 2016. But, I didn’t feel anything bad about it because I knew I could never time the market and could never buy at bottom.

As to the 3rd reason, we need to answer one question: How’s the production so far?

For first 2 months of 2016, Malaysia’s palm oil production is down ~4.8%. See the table below. We don’t have Indonesia’s production statistic, but if we look at the well managed company, First Resources’s Internal FFB production for first 2 months, it’s down 7.3%. So, all this data is pointing to potentially lower production for 2016, supporting the drought effect.

Malaysia’s palm oil exports for first 2 months of 2016 was up +9.2%. As a result, its inventory level dropped from 2.63mt in Dec 2015 to 2.17mt in Feb 2016. All this is supporting the CPO price, which rose from RM 2350/t in Dec 2015 to RM 2685/t today.

Part of the rise could be attributed to higher crude oil price and soybean oil price too, but this relationship is very hard to analyze, and I never could. Current crude oil price at $41/bbl could be temporary, and I had no slightest idea where it’s moving next, especially when it’s so volatile in past 1 year. It could change direction very quickly and catch analysts off guard. So, it’s best to not predict where it’s moving.

I didn’t expect CPO price to rise so much to RM 2685/t today, and don’t know how long it could stay at levels above RM 2600/t. But, the lower production and falling inventory are currently supporting this sector, and I think I should ride along a bit longer. Also, based on current CPO price of RM 2685/t, if it holds longer, Bumitama is still under priced at 0.92. It should bounce back to price level above 1.00 with current CPO price. For now, I will HOLD.

MPOB Production - 2016 Feb

 

 

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