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David Kempton: neglected palm oil companies get my cash
Our columnist and travelling investor David Kempton explains why he has invested in a trio of palm oil companies.
Over the past three decades annual production of palm oil has grown from 2 million to 50 million tonnes as it has become an essential ingredient in the production of margarine, chocolate, ice cream and soap.
There are fast growing cooking oil markets in China and India and the US, where there is an accelerating trend away from animal fats. Additionally, 16% of production is now used for biofuels, where the cost of palm oil and Brent crude oil seem correlated: there is a rule of thumb that when the price of palm oil per tonne is no more than eight times that of oil per barrel it works well as a biofuel – which is the current case.
Palm oil can only be grown commercially in a narrow equatorial belt around the world, now an essential product for the economies of those countries in Asia and Africa.
Traditionally, commercial production has been in Malaysia and Indonesia, where the UK quoted companies are mostly located. This has changed recently as increased demand put pressure on deforestation and lost habitats of orang-utans and other wildlife. Hence operations have now developed successfully in Papua, equatorial Africa and America.
There are seven quoted UK companies and from an investment perspective the palm oil sector seems to have hit a sweet spot. The price hovers round $1,000 per tonne, whilst world stocks are low with very powerful growth projections.
The violent climatic events that seem to occur weekly round the world impact only marginally in the equatorial belt, where climate remains reasonably stable.
And unlike many other commercial crops, the fruit is largely unaffected by disease. Hence corporate earnings are very predictable compared to almost any other sector with a regular cycle of planting, harvesting, milling and shipping to meet the world’s growing demand.
My UK picks
With this background, the UK quoted companies look a compelling investment case, whilst all vary with geography, approach and longevity. I am invested in three of them, which I describe here, not listed in terms of attraction (a personal judgement) but the size of my investment and, hence, their importance to me.
I visited Equatorial Palm Oil (PAL:AIM) in Liberia last month and spent some time at their massive plantations. An investor would need to feel comfortable with the country; a normal start for any remote investment - and not just in Africa. The two revolutions in Liberia were horrible and the Charles Taylor effect has scared people off even after he left the country in 2003 (and now awaits trial in The Hague.) The country has settled down well in the last nine years with its predominantly Pentecostal Christian religion, well governed by the respected lady president, Ellen Johnson Sirleaf, who was recently re-elected for another six year term.
The company purchased neglected estates from the government and is achieving rapid transformation whilst recruiting labour forces with experience from the previous established plantations.
The Australian management employed a director of plantations with 40 years experience of the sector in Asia, who has brought with him an impressive team to manage all aspects of the development. Climatically, output will always be less than in Asia, but with cheaper production costs.
The company listed two years ago on the UK’s alternative stock market (AIM), raising sufficient funds to obtain a concession to develop an enormous 170,000 hectares in one of the best cultivation locations in Africa, and target planting 50,000 hectares by 2020. This scale would seem madly ambitious except for their fortune in having Siva Group, a wealthy Indian technology group, as a partner in the project, owning 29% of Equatorial.
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Look up the shares
- Equatorial Palm Oil PLC (PALO.L)
- R.E.A Holdings PLC (REAH.L)
- New Britain Palm Oil Ltd (NBPO.L)
- Asian Plantations Ltd (PALA.L)
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