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An Investor’s Quick Guide On The Cost Structure Of Bumitama Agri Ltd

Bumitama Agri Ltd (SGX: P8Z) is a palm oil company.

Its primary business activities are cultivating oil palm trees, as well as harvesting and processing fresh palm fruit bunches (“FFB”) into crude palm oil and palm kernel oil, which are sold to refineries in Indonesia. Its operations are located in three provinces in Indonesia, namely, Central Kalimantan, West Kalimantan, and Riau.

As investors, we may want to understand the cost structure of Bumitama Agri to help us better evaluate the company. To do so, we can use readily available information from its latest 2015 annual report.

We can start with an overview of the company’s cost structure through its profit and loss statement. Our main focus is on the operating cost.

first-resources-table-1-lawrence
Source: Bumitama Agri 2015 Annual Report

A key observation we can make from the table above is that Bumitama Agri’s cost of sales is the biggest component of its operating cost. The remaining operating cost includes its selling expenses, general & administrative expenses and its finance cost.

So, to really understand the cost structure of Bumitama Agri, we must dig deeper into its cost of sales (also known as its cost of production). Here’s a table from the company’s 2015 annual report showing just that:

first-resources-table-2-lawrence
first-resources-table-3-lawrence
Source: Bumitama Agri 2015 Annual Report

There are a few observations we can draw.

First, we can see that FFB (fresh fruit bunches) represented the biggest component of the cost of sales. Out of the total FFB processed in 2015, about 63% was purchased internally while the remaining was from external sources.

Second, depreciation of its property, plant and equipment represented less than 3% of Bumitama Agri’s total production cost in 2015. These costs are generally fixed in nature. In other words, an increase in FFB volume processed will allow Bumitama Agri’s factories to achieve higher utilisation of their assets with little increase in depreciation costs.

A Foolish conclusion

By understanding the different cost components within Bumitama Agri’s cost structure, investors can better appreciate the risks and opportunities that are associated with the company.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.