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3 Risks Investors Should Pay Attention to When Investing in Bumitama Agri Ltd

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

Current and prospective investors in Bumitama Agri may want to pay attention to three risks affecting its business.

Commodity pricing risk

Bumitama Agri is an oil palm plantation company that focuses primarily on cultivating oil palm trees, harvesting fruits from the trees, and processing the fresh fruit bunches (FFB) from the trees into palm oil and palm kernel.

Its operations are located mainly in three provinces in Indonesia, namely Central Kalimantan, West Kalimantan, and Riau. As of December 2016, the company controls plantations that total 175,243 hectares in size.

Unlike some of its peers such as First Resources Ltd (SGX: EB5) and Wilmar International Limited (SGX: F34), Bumitama Agri’s business has no downstream production component whereby palm oil is turned into consumer products.

As such, Bumitama Agri’s business is widely exposed to any fluctuations in the price of crude palm oil (CPO).

Investors should consider this risk factor seriously before investing in Bumitama Agri, since the company’s management has little means to control this risk beyond the use of financial derivatives.

Production risk

The production of palm oil is generally affected by three factors, namely, the land planted, the FFB yield per hectare, and the extraction rate (the last factor depends on the oil content of the palm fruits harvested, and the factory’s efficiency).

Of the three factors, the FFB yield is probably the most important driver of production volume. Yet, it is highly dependent on many external conditions that are beyond management’s control, such as weather. In 2016, Bumitama Agri’s FFB yield per hectare declined from 17.8 metric tonnes per hectare to 14.6 due to adverse weather conditions.

In a similar manner to the aforementioned CPO pricing risk, management has little ability to control the weather, and thus investors must be willing to accept production risks with Bumitama Agri.

Foreign exchange risk

Given the fact that Bumitama Agri’s shares are quoted in the Singapore dollar and that the company derives its income mainly in Indonesia, there is foreign exchange risk with the company. Investors need to pay attention to changes in the rupiah with relation to the Singapore dollar.

If the rupiah depreciates against the Singapore dollar, it could significantly dilute any growth the company has achieved in rupiah terms. It could also bring the value of the company’s assets down in terms of the Singapore dollar.

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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.