The oil palm industry has always been one key pillar of Malaysia’s economy and major contributor to the development of our country. Today, Malaysia stands as the 2^nd largest producer of palm oil (behind Indonesia), amounting to about 30% of global supply (vs Indonesia’s close to 55% supply, and other countries do not export much), we are undoubtedly the world leader in terms of technological developments and breakthroughs in this field.

In the past decades, palm oil companies used to be highly favoured by market players, typically fetching premiums of above 20-30x earnings and were found in many investment portfolios from both institutional funds and retailers. Understandably so, because palm oil is a highly versatile commodity, used in the production of food, cosmetics, industrial chemicals, and even as an alternative source of biofuel. Essentially, palm oil was involved in both consumer staples as well as industrials, thus making them have resilient demand regardless of economic conditions.

However, in recent years, the sector has fallen out of focus and have been sidelined in lieu of other hot sectors. With sectoral valuations hovering near decade lows in spite of continuously improving performances and several catalysts that could support these high profit numbers, could this be the time for the local plantation sector to be in focus once again?

But first, let’s have a better understanding of the palm oil industry before we dive deeper.

Palm Oil Industry Overview:

1. Oil palm life cycle

Oil palm trees typically have a 25 year economic lifespan:

1. First 5 years (0-5): Immature and produce very minimal yields

2. Second 5 years (5-10): Young with increasing output but not optimal

3. Next 10 years (10-20): Prime-aged with highest production

4. Final 5 years (20-25): Old and yields start to decline

Usually, oil palm trees are scheduled for replanting by the time they reach the end of their lifespan, and the cycle begins again.

Naturally, cutting the old trees and replanting costs a lot of money (about RM 20-30k per hectare), but are just part of the business cycle and trees will more than pay back their cost over the next 25 year cycle again. Typically, the rule of thumb is that the replanting rate needs to happen at about 4% per year to maintain steady production over the long term.

The output (products) of palm oil plantation products are Fresh fruit bunches (FFB), which are then processed into a number of final products including:

1. Crude palm oil (CPO)

2. Crude palm kernel oil (CPKO)

3. Palm kernel shells (PKS)

4. Palm Kernel Meal (PKM)

The by-products are Empty Fruit Brunches (EFB) and Palm Oil Mill Effluent (POME) which are commonly used as mulch or composted into organic fertiliser. Sometimes these by-products are dried and used as a source of fuel for the boilers in the palm oil mills.

Increasingly, PKS, which was historically just burned as fuel, is seeing demand from Japan as a source of renewable energy after being palletized. Elridge is one company serving this niche.

2. Seasonality

There are mainly 2 seasons for planters: peak crop season and low season, coinciding with the monsoons and droughts. Typically, peak crop is in 2H of the year (Jul-Dec), while low production tends to be in the 1H (Jan-Jun).

This cyclicality also means that evaluating plantation companies on a quarterly basis is less meaningful, and the financial numbers need to be taken in context with the weather patterns at the location. Generally, this also means that FCPO prices are slightly inverted against production seasonality.

3. Supply and Demand Dynamics

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