Why Have Bumitama Agri Ltd’s Shares Lost 21% In Value Over The Last 4 Years?

I think it is fair to say that most investors want to find stocks that can increase in value in the future, either from an appreciation in the share price or through the distribution of dividends.

So, it’s worth keeping in mind the idea that both factors – price appreciation and dividends – are generally derived from the same source, a company’s profit.

This profit is, in turn, driven by a company’s business performance. In general, companies with strong businesses exhibit sustainable growth, high margins, high returns on equity, and low gearing (gearing is a gauge of how much debt a company’s taking on).

In here, I want to look at the business performance of Bumitama Agri Ltd (SGX: P8Z) over its last five financial years and track the total return of its stock.

As a quick background, Bumitama is a palm oil producer. Its primary business activities are the cultivation of oil palm trees, the harvesting of fresh fruit bunches, the processing of the bunches into crude palm oil and palm kernel oil, and the sale of the oils to refineries. The company has over 160,000 hectares of plantation land located in three provinces in Indonesia, namely, Central Kalimantan, West Kalimantan and Riau.

Here’s a table showing Bumitama Agri’s revenue, net profit, net profit margin, return on equity, and gearing from 2011 to 2015:

Source: Bumitama Agri 2015 annual report

As you can see, Bumitama Agri has had pretty consistent revenue growth. From 2011 to 2015, the company’s top-line has nearly doubled.

Yet, the growth has not translated into corresponding profit increases due to a decline in the price of crude palm oil – the company’s bottom-line had stepped up by only 11% over the same period. This has resulted in Bumitama Agri’s net profit margin declining over the years.

Meanwhile, the company’s return on equity has also fallen. The return on equity measures a company’s ability to generate a profit from the shareholder’s capital it has; in general, the higher it is, the better it could be. But, it’s also worth noting that the return on equity can be propped up through the use of higher borrowings. This brings me to Bumitama Agri’s gearing.

The palm oil producer’s gearing has stepped down a little from 2011 to 2015, so Bumitama Agri’s lower ROE can be traced a little to that.

Over the four years ended 22 December 2016, Bumitama Agri has seen its share price fall by 24%. If gains from dividends are included, the company’s total return improves only to a negative 21%. This has happened despite the palm oil producer’s profit climbing.

Thing is, over the past few years, the Indonesian rupiah has devalued when compared to the Singapore dollar. As such, despite enjoying slight profit growth in rupiah terms, Bumitama Agri’s profit in Singapore dollar terms would likely have declined instead.

The experience of Bumitama is a reminder for investors to be mindful of currency risk when looking at companies that report in foreign currencies.

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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.