The Better Palm Oil Stock: First Resources Ltd Or Bumitama Agri Ltd?

One of the industries that is dominated by Southeast Asia is the palm oil industry. Just Indonesia and Malaysia combined have a market share of over 80% of the global supply of palm oil.

In Singapore’s stock market, companies such as Wilmar International Limited (SGX: F34) and Golden Agri-Resources Ltd (SGX: E5H) are examples of large companies with significant exposure to the palm oil industry.

For investors who wants to invest in palm oil companies that are relatively stable, yet with room for further growth, two names come to my mind: First Resources Ltd (SGX: EB5) and Bumitama Agri Ltd  (SGX: P8Z).

Both companies are smaller than Wilmar (which fetches a market capitalization of S$22.4 billion) but are still significant in size, thereby offering relative stability. First Resources has a market cap of around S$3.1 billion while Bumitama Agri’s market cap is around S$1.4 billion.

In this article, I want to make a quick comparison between First Resources and Bumitama Agri based on five different aspects using their latest numbers for the years 2015 and 2016.

1. Revenue and profit growth

The table below shows how First Resources and Bumitama Agri’s revenues and profits changed in 2016:

First Resources and Bumitama Agri revenue and profit table
Source: First Resources and Bumitama Agri earnings release

Although First Resources’ revenue growth outpaced Bumitama Agri’s, the latter company had experienced faster profit growth.

2. Weighted average age of plantation

In general, it’s preferable for a palm oil company to have a lower weighted average age for the oil palm trees in its plantation. A low weighted average age confers two benefits, namely, a longer overall period for harvesting, and a potential increase in the fruit-yield per hectare in the future as the trees mature.

First Resources and Bumitama Agri plantation age table
Source: First Resources and Bumitama Agri’s earnings presentation

It’s clear that Bumitama Agri is the one with the lower age profile for its plantation, although the gap isn’t too wide.

3. Fresh fruit bunches (FFB) yield

The FFB yield measures the amount of FFB produced per hectare in a company’s plantations. Obviously, the higher the number, the better. The table below shows the FFB yields for First Resources and Bumitama Agri in 2015 and 2016:

First Resources and Bumitama Agri FFB yield table
Source: First Resources and Bumitama Agri’s earnings presentation

We can see that the FFB yield for both companies dropped in 2016; adverse weather conditions was the main culprit. In terms of the yield per hectare of land cultivated, we can see that First Resources is superior to Bumitama Agri.

4. Factory extraction rate

The extraction rate is a measure of the percentage of palm oil that is recovered for every tonne of FFB processed. An extraction rate of 20% means that for every tonne of FFB milled, a palm oil company can recover 200kg of palm oil.

First Resources and Bumitama Agri extraction rate table
Source: First Resources and Bumitama Agri’s earnings presentation

Both First Resources and Bumitama Agri saw their extraction rates decline in 2016. But, Bumitama Agri has consistently been the one with the slightly better extraction rate.

5. Strength of the balance sheet

We can compare the strength of the two companies’ balance sheets by looking at the total debt to equity ratio, which is also known as the gearing ratio. As of 31 December 2016, First Resources has a total debt to equity ratio of 48.4% while Bumitama Agri’s selfsame ratio is 65%. This shows that First Resources is the one with a stronger balance sheet.

When we put together all we’ve seen above, Bumitama Agri is the company that has the potential for more growth given its younger age profile for its plantations. But, First Resources is ahead in terms of the FFB yield and also has a lower gearing ratio. So, each company has its own set of strengths.

In any case, it’s worth noting that all the information above about First Resources and Bumitama Agri should be seen only as a useful starting point for further research.

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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.