This Might Be the Best Palm Oil Share Around

While all eyes are fixed on the price of oil following its recent declines, there’s another type of oil which has actually seen its price drop steadily since February 2011. Meet crude palm oil.

The commodity, which is used in the manufacture of many types of processed foods, has seen its price slide by almost 44% from around RM3,800 per ton on February 2011 to RM2,100 per ton currently.

Palm oil producers listed in Singapore have been heavily affected – as a group, they’ve lost 40% on average from the start of February 2011 to 2 December 2014. This has happened even as the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI), has gained 3.7% in the same timeframe.

The group consists of Wilmar International Limited (SGX: F34), Golden Agri-Resources Ltd (SGX: E5H), First Resources Ltd (SGX: EB5), Indofood Agri Resources Ltd (SGX: 5JS), Mewah International Inc (SGX: MV4), Kencana Agri Ltd (SGX: F9M), and Global Palm Resources Holdings Ltd (SGX: K6J).

It includes essentially all of the palm oil producers in Singapore’s share market (as of July 2014, according to the Singapore Exchange) save for Bumitama Agri Ltd (SGX: P8Z). Bumitama wasn’t included in the group because it wasn’t listed back in February 2011.

Falling palm oil prices have a strong effect on the share price performance of the producers because the health of their businesses are strongly influenced by the price of the commodity. It’s for this reason that investors should be thinking hard about which palm oil companies are best suited to thrive even in a difficult environment.

To separate the wheat from the chaff, I looked for the palm oil producers that have managed to 1) generate positive operating cash flow that has managed to grow consistently in each calendar year between 2007 and 2013 (with only one year of decrease allowed); and 2) have a ratio of cash to total borrowings of no less than 50% in each of those six years.

The two criteria were meant to sieve out good operators with strong balance sheets. Turns out, of the group of seven palm oil producers (Bumitama Agri is again left out of my study because it does not have such a long track record), only First Resources made the cut.

First Resources' financials

Source: S&P Capital IQ

First Resources’ track record shows that not all palm oil producers are at the sole mercy of palm oil prices. And interestingly, the company’s shares had also managed to clock a 30% gain between 1 February 2011 and 2 December 2014 – such is the difference in returns a company can bring for its investors when it manages to deliver above-average business results.

None of the above is meant to say that First Resources can continue its record of excellence. But at the very least, the screen I’ve done can help investors narrow the field of palm oil producers to the ones which might be worthy of further study.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.