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Strong growth predicted for Lankan oil palm industry

FC Research quoted by Mirror Business 

By Chandeepa Wettasinghe

Sri Lanka’s oil palm plantation operators can expect strong growth in the industry for the foreseeable future due to the global palm oil demand, the research arm of a Colombo-based equity brokerage said in a report.

“This growth is on the back of global palm oil prices moving upward due to the expectations of global shortages in supply matching demand,” First Capital Research (FC Research) said.

It noted that due to the El-Nino weather conditions, the reducing rain fall in the major oil palm cultivating countries such as Malaysia, Indonesia and Thailand in 2015, the supply from those markets are expected to drop by six million tonnes.

“It is expected that the supply of palm oil will not meet the demand in coming years, pushing up the price as forecasted. Global price increase will push up the local palm oil price in correlation,” FC Research said.

It added that within three months, the palm oil prices, which were US $ 583.19 per tonne increased to US $ 692.41 per tonne last September and that the prices would move up to US $ 713 per tonne by 2020, according to the World Bank estimates.

Palm oil is used as a raw material in making vegetable oil and biodiesel—which is gaining demand due to the world moving towards less crude oil consumption—and the combined manufacturing of both are expected to grow by 7.9 percent annually until 2025, according to FC Research.

In Sri Lanka, Watawala Plantations PLC was the country’s first and currently the largest oil palm cultivator with around 3,157 hectares under cultivation under a diversification effort that began over a decade ago, which allowed it to remain profitable during hard times for tea and rubber recently.

Namunukula Plantations PLC had an extent of 2,020 hectares of oil palm under cultivation, followed by Elpitiya Plantations PLC with 1,447 hectares and Agalawatte Plantations PLC with 1,294 hectares at the start of the current financial year.

Kegalle Plantations PLC is planning to plant 1,125 acres of oil palm in its current rubber fields, while Bogawantalawa Tea Estates PLC has also announced its intentions to plant 700 hectares of oil palm over the past year.

FC Research said that oil palm cultivation requires less labour, with just 0.1 workers required per hectare, compared to four workers for tea and one worker for rubber required for the same land extent under cultivation. Oil palm workers have also been noted to earn three times as much as a tea plucker.

Labour wage payment is a major issue in the tea and rubber-dominated plantation industry, which was only recently able to come to a compromise with the trade unions in increasing wages.

‘Elpitiya Plantations Firing up the Palm oil Engine’

FIRST CAPITAL RESEARCH – COMPANY REPORT PUBLISHED ON THE ISLAND NEWSPAPER.

elpitiya

Elpitiya Plantations PLC (ELPL) is a listed regional plantation company engaged in Tea, Rubber and Palm oil cultivation. ELPL is expected to grow its earnings at a CAGR of c.36% FY16-FY19E, to c. LKR 500Mn in FY19E. Earnings will grow on the back of Palm oil having segment margin improving and contribution to revenue portfolio increasing. FC Research expect ELPL to provide an annualized return of 46% with a fair value of LKR 27.0 by FY18E. STRONG BUY

Palm oil to drive bottom line growth: ELPL’s top line is expected to grow at a CAGR of c.10%YoY in FY16-FY19E. FC Research expect that performance will be on the back of earnings from Palm oil improving with a CAGR of c.28%YoY. As of FY16 Palm oil contributed 17% to ELPL’s revenue portfolio which FC Research expect to increase to c.27% by FY18E. This growth is on the back of global Palm oil prices moving upward due to expectations of global shortages in supply matching demand and mature palm oil plantations hectarage of ELPL increasing by CAGR of c.13%.

Multiplexing revenues through investments: ELPL has diversified from its principal activities to manufacturing specialty tea Hydro power generation, hotel and adventure park operations through its investments which will create additional revenue streams to ELPL. FC Research expects ELPL to benefit substantially from Elpitiya Dianhong Jin Ya Tea Company (Pvt) Ltd as it will provide an edge to acquire market share in China, 10th largest customer of Ceylon tea and a high growth market, and AEN Palm Oil processing (Pvt) Ltd will provide synergy to ELPL by boosting margins in the segment.

ELPL to provide a return of 46% by FY18E: FC Research estimates ELPL’s fair value at LKR 27.0 (DCF based LKR 30.5, PER based LKR 24.3) providing an annualized return of 46% in FY18E.

Investment risk: Impact from government policy actions in estate worker wage hike and cap on land held by plantations Company is yet to be seen. ELPL is also exposed to the risks of key currency rates’ fluctuations and volatility of product prices.

-First Capital

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