Not every commodity is down. While reading the central bank monetary report, I have found this nice comparison.
CPO is up. But to be precise, it has been going up since mid-last year. Q2 financial report should be useful enough to get a good idea of what is going on in this year.
I have been saying this in previous posts: When CPO rises, all major palm oil producers will show significant improvement, and BWPT would see the most improvement among other palm oil companies. What I meant by improvement (which then to be compared to others) is EVA momentum: a change in EVA divided by the prior year's sales. Let's see how it goes so far.
I am pleased to say that we are indeed seeing EVA improvement in the last twelve months (LTM Q2 2020).
Despite rising CPO prices in the second half of last year, it did not materialize into profitability gain. The positive impact of rising CPO prices was too late and too little in last year. But we are seeing that gain now. EVA momentum for the last twelve months was positive 7,8%.
And if CPO price could stay at the current level until the end of this year (I suspect it will continue its rise; read here), EVA momentum will be even higher because twelve months calculation is like an average, and more importantly, because we could expect higher fruit production in the rainy season.
To make sure that this improvement is indeed happening industry-wide, I check with AALI.
The main reason why I updated AALI data was that I want to make sure that I got the numbers right for BWPT. It is common sense to invest in AALI if you are high on palm oil stocks. I have high confidence that AALI will be better when I see CPO prices. But I want my data is updated for BWPT.
I am pleased to say that the improvement is real. AALI EVA momentum is positive 3% for the past 12 months.
Note that EVA momentum for BWPT (7,8%) was indeed significantly higher than AALI (3%). Just as I was anticipated in prior post "Indonesian Palm Oil Companies In 6 Charts". That is because BWPT starting point was really bad. It got a major boost from better-fixed asset utilization.
But let me point out palm oil companies have been economically unprofitable for a long time. AALI is no exception. That is because they have been aggressively expanding their plantations. Money is being aggressively invested from the early 2000s until 2011. Forests are burnt down in areas where stored carbon in the soil are high, and then we expel WWF who dared to criticize it. Then CPO price collapsed in 2011 and greed got what it deserved. BWPT sin was worse because, for whatever reason, it purchased new lands at an inflated price in 2014 (it purchased lands from a Malaysian SOE).
Let me say this again. In my view, BWPT is a high risk, high reward company to invest. It is high risk because it takes a lot to make this company economically profitable (or just to be wealth neutral, a.k.a EVA = 0). I believe it is highly possible, and you don't need to dream of sky-rocketing CPO prices for that to happen. Its gross margin in 2017 should do the trick. That would imply CPO price to be somewhere in 3000 MYR/Tons.
But the possible improvement is high. EVA momentum would be above 10% for a couple of years (majorly from 'better-fixed asset utilization', all thanks to the major blunder in 2014). EVA momentum 10% or more for a couple of years (or even for 1 year) is a solid recipe for a major stock price appreciation. Generally, I would say it is a dangerous game: it relies heavily on you making big forecast... and being correct.
I am closing this brief analysis with a good sign that comes from AALI (see chart above).
For the first time in a long time, investors' expectation of future economic profit growth (marked with the grey area) is at the lowest level (when it reached 4.700/share). And here is the best part. It happens when EVA is improving. If this EVA improvement could persist at least for another year, this is a good indication that AALI has reached the point of extreme pessimism in last March 2020. If that is the case, we may have seen AALI major low (see also AALI Elliott Wave interpretation which the market is following nicely so far). This is an important finding for BWPT, since BWPT tends to lag (AALI moves first, BWPT later).
EVA Gallery Is ON!
I have been finding ways to better keep track of EVA analysis I have done so far. Looking at charts is certainly a much more efficient way to get the general idea. That's where Instagram gives me a solution. I will not write short analysis there. It will be just charts of true economic performance of companies. More EVA charts will be added whenever I have extra time. Click the link below to enter EVA gallery.
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