One of many investment strategies that have worked well over time is to be a contrarian, which essentially means to be an investor who’s not following the herd. In other words, being a contrarian means buying (selling) stocks that others shy away from (are clamoring for).
In this article, I want to share a potential contrarian investing opportunity, namely, Bumitama Agri Ltd (SGX: P8Z). Since hitting a high of S$1.23 four years ago in 2014, Bumitama Agri’s share price has fallen by nearly 50% to S$0.645 currently. In fact, the company’s share price is down by around 12% over the past year too.
I think there are many good reasons for investors to considering investing in the company now. In a previous article, I had shared two of them; as a quick recap, they are:
1. A good track record of growth
2. Strong performance in recent quarterly earnings update
In this article, I want to share two more reasons.
As a quick introduction, Bumitama Agri is a palm oil producer. The company has over 180,000 hectares of plantation land located in three provinces in Indonesia, namely, Central Kalimantan, West Kalimantan, and Riau.
Reason 3: Rising dividends
One of the key criteria that we as investors should look for when investing in a company is its track record in paying dividends. The key here is stable – or even better, rising – dividends over the years.
In the case of Bumitama Agri, it has done just so. The palm oil producer had grown its dividend by 129% from S$0.012 per share in 2013 to S$0.0275 per share in 2017. The company’s dividend had climbed at an even faster rate than its profit over the same period. Bumitama Agri currently has a dividend policy of distributing up to 40% of its distributable income in each year as a dividend; the company’s dividend in 2017 was in line with its dividend policy.
The palm oil producer’s dividend policy looks sensible to me, and so I think the company will continue to pay a good dividend as long as it can sustain its profits.
Reason 4: Young palm tree plantation
As of January 2018, the weighted average age of Bumitama Agri’s palm trees was 8.9 years. Palm trees are usually harvested till they’re between 25 and 30 years old, with the prime age of fruit production generally ranging from 8 to 17 years. Given that most of Bumitama Agri’s palm trees have just entered their mature phase, investors can expect the company’s production yield to improve in the next few years. In fact, in the second quarter of 2018, Bumitama Agri’s fresh fruit bunches (FFB) yield – the amount of FFB produced per plantation hectare – was up by 19.6% year-on-year to 5.5 tonnes/hectare.
Assuming no change in palm oil prices, the age profile of Bumitama Agri’s palm plantation should support its current level of profitability. The assumption is a big one though, as palm oil prices have been volatile in the past.
Wrapping it up
In sum, Bumitama Agri’s share price performance is not reflective of the merits of its business that I have pointed out in this article and in my previous article that I mentioned earlier. Though market sentiment on the company is anything but positive for now, enterprising investors in the company may see positive investment outcomes going forward, as long as the company can continue to deliver good financial results.
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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.