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Is The Palm Oil Industry Experiencing A Strong Turnaround Now?

The palm oil plantation industry has not been performing well over the past few years. Most of the palm oil companies listed here in Singapore, such as Golden Agri-Resources Ltd (SGX: E5H), Bumitama Agri Ltd (SGX: P8Z), and Indofood Agri Resources Ltd (SGX: 5JS), are trading below their share prices seen five years ago.

Many of them have also seen their net profits decline, mainly due to lower palm oil prices. But, in the fourth quarter of 2016, signs of a recovery have appeared. Is the industry ready for a strong recovery after years of struggle? Let’s take a look.

Bumitama Agri announced its 2016 fourth quarter results recently. It saw good growth in production in the reporting quarter when compared to a year ago. To the point, Bumitama Agri’s fresh fruit bunches and crude palm oil (CPO) production were both up by around 11% year-on-year.

What is more interesting is that the 11% improvement in production volumes have led to way better growth in revenue. In the fourth quarter of 2016, Bumitama Agri’s revenue surged by 57% year-on-year. Moreover, the company achieved a stronger gross margin, leading to an 80% jump in gross profit. All these pushed Bumitama Agri’s net profit 171% higher compared to the fourth quarter of 2015.

Although this is just one quarter’s results for one company, the performance is encouraging for the palm oil industry on the whole. Bumitama Agri’s results display signs of stronger pricing for CPO and improving production yields for oil palm plantations in Indonesia after the weak production rates seen a few quarters ago.

The stock market may be sensing some improvement in the industry as well as many oil palm plantation companies are trading at much higher stock prices compared to a year ago. If the headwinds for the industry are really over, it would be great news for most plantation companies and their shareholders.

But for investors looking to invest in the industry at the moment, it is important to note that a rising tide would not lift a leaking boat. Companies with weak financials and/or poor management may not grow even if the industry is recovering.

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