Investors Beware! There Are Things Affecting Profits That Companies Cannot Control

Bumitama Agri Ltd (SGX: P8Z) is one of the fastest growing oil palm plantation companies in Singapore’s stock market.

Growing taller

From 2011 to 2015, the company managed to increase its total planted area by nearly 40% to 164,177 hectares. Meanwhile, its mature planted area almost doubled to 122,474 hectares.

In terms of production figures, Bumitama Agri had boosted the volume of its fresh fruit bunches (FFB) production by 21.1% annually from 2011 to 2015 – for some numbers, the company had produced 1.065 million tonnes of FFB in 2011 and 2.290 million tonnes in 2015. Moreover, its FFB yield had also improved by 9% from 16.3 tonnes per mature hectare in 2011 to 17.8 tonnes per mature hectare in 2015.

Yet interestingly, the company’s net profit had increased by a total of only 17% over the period in its reporting currency of the Indonesian rupiah. And because of the massive devaluation of the rupiah against the Singapore dollar from 2011 to 2015 (a devaluation of over 30%) Bumitama Agri actually experienced a decline in profitability in Singapore dollar terms. You can see these in the table below:

Bumitama Agri Profit table
Source: S&P Global Market Intelligence

Why would a company that is growing and managing its business assets so well (as alluded to by the growing planted area and stronger production volumes and efficiency) still see its profit go nowhere after four long years?

Beyond one’s control

Thing is, the story of Bumitama Agri is a strong reminder to all investors that there are factors that can affect the business results of a company and yet lie completely outside the control of the firm. And, investors need to be well aware of such risks.

In Bumitama Agri’s case, that key factor is the price of crude palm oil (CPO). Given that the company is basically producing and selling a commodity product – CPO – it can only sell at prevailing market prices.

There are many ingredients that go into the mix that is the price of CPO. These include: (1) the demand for CPO, (2) the supply of CPO, (3) weather phenomenon which can affect supply, (4) government policies, and (5) fluctuations of currencies.  Crucially, they are things not within Bumitama Agri’s control.

Over the last four years from 2011 to 2015 when Bumitama Agri was aggressively expanding its level of production and growing its plantation size, the price of CPO had unfortunately declined, from over RM3,800 per tonne to around RM2,100 per tonne. CPO producers, Bumitama Agri included, saw their profit margins being squeezed badly as a result.

In 2011, Bumitama Agri’s gross margin was 44.2%. By 2015, that had declined to just 32.8%. Together with rising operating costs, the company’s net profit margin had slipped from 31.8% to 17.9%. These had contributed to Bumitama Agri’s relatively flat profit growth.

Foolish Summary

As investors, when analyzing a company, it is important to know how the company is managing and growing its business. But, it is also crucial to know that doing all the “right” things may not result in commensurate growth for some companies.

In many cases, there are factors completely outside the influence of a company that can have a big impact on its profit and cash flows. And as investors, it may pay to be well aware of such risks before investing.

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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 Stanley Lim doesn’t own shares in any companies mentioned.