Thursday, 25 May 2017

Talk about business combo, probably you need to look at this company

Despite the 4 to 5 months long bull run in the KLSE, if you would agree with me, 1 of the segment which is still lacking is the plantation industry.

There had been a lot of headwinds in this particular industry. Firstly, the industry is hit by a higher minimum wages for it's worker. Subsequently, the usage of palm oil in edible consumer good is being boycotted by some Europe country in order to promote the usage of soy beans. Then, we have a cyclical weather of El Nino that will hamper the production of the fruits and the OER (Oil Extraction Rate) of the fruits.

While all this uncontrollable factors are inevitable, it will then boils down to the plantation company's prudent management as well as new strategy in order to keep it's competitiveness in the industry. Those company that had taken initiative to evolve for the better will continue to survive and keeping on the top of the packs.

But, if I would to ask you - How many plantation companies that you know, had taken such measure to make a bold step and evolve for the better ? For some bigger plantation company, probably that would be having a palm oil mill for oil extraction. But for most, they just want to plant palm oil, and sell palm oil.

Of course for now, I am going to share with you this 1 company that had taken a bold step in evolving it's business and adding value to it's existing plantation operation. As you know that global warming had push further on the usage of green energy, and what this company does in investing for a Biomass and Biogas renewable energy plant is just perfect to the notch.

Need not much of introduction, this company Sabah based plantation company is called - CepatWawasan Group Berhad (Cepat - 8982).

It was in 2014 that Cepat had invested in a 12MW Biomass Renewable Energy Plant and a a 3MW Biogas Renewable Energy Plant. However, the Biogas Renewable Energy Plant is currently upgraded into 3.8 MW, hence putting a combined output of 15.8 MW.

Now it is the time where Cepat will be able to reap the profits from the investment from the operation of the renewable energy plant. For the 1st Quarter of 2017, the renewable energy segment had contributed to 6.35 million in revenue. The figure will be expected to be raise with an additional 0.8 MW added into the Biogas plant, as well as more production of fresh fruit bunches this year.

The latest quarter had saw Cepat revenue increase significantly. For the past 4 rolling quarters, it had achieved a total EPS of 9 cents.

For a consistent growing company that pay dividend with diversified income from renewable energy, it will be fair to value Cepat based on PER x 12, which bring to a valuation of RM 1.08.

As you can see, the price of palm oil had been looking at a long term bullish with higher volatility in price swing. I will not give you a 5000 words research to tell you why palm oil is going up, but summarize in 3 of my own point
- Population is going up, and demand for food is going up.
- The higher usage of palm oil blend in bio diesel.
- The global weather is getting hotter and hotter, and a tough crop like palm oil tree can withstand harsh weather, making it a reliable investment.

By looking at the CPO price chart, we can possible see CPO being traded at the range of 3000 for the next 3 months due to a hotter weather generated from El-Nino. And a hotter weather with lesser rain will encourage more harvest at the plantation site, hence boosting the input to the renewable energy plant.

Now as you look at the price chart of Cepat, honestly I do not think Cepat will fall back below the support at 80 cents. This is due to additional revenue stream from the renewable energy division that can cushion the price fluctuation in the CPO. However, the share price could possible poise for an up leg, which can potentially looking to hit RM 1.05.

Last but no least, there had been a strong correlation movement between MHC and Cepat. It is understandable that MHC is also the biggest single shareholder in Cepat. With corporate exercise spanning across the equity market, it will not be impossible for Datuk Mah King Seng to do a reorganization with M&A activities to streamline the group operation and unlock the value in Cepat.

So, if you are a investor that like recurring income, I believe a plantation and renewable energy combo can be considered as one of the good combo that you can get in the market. Of course, through the journey, I believe the dividend from the business operation will subsequently increase.

In the end, you have to be "Cepat", because if you are "Lambat", then you will get nothing.

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