Plantation companies are a big part of the Malaysian stock market, with big names like Sime Darby, Kuala Lumpur Kepong, Genting, and IOI Plantation. The palm oil, or oil palm, industry remains popular among investors in Malaysia, alongside others such as rubber, timber, durian, and tea.

Here are key considerations you should make when investing in plantation companies. The palm oil industry will be used as the primary example, although these can be applied to other plantations as well.

1. Determine the land size of the company

You should know what size of land a company has, as this determines how much it can produce and, subsequently, how much revenue and profit it can generate. In 2020, mature palm oil plantations alone occupied 5.2 million ha.

Publicly listed plantation companies usually disclose how much land they have. It is important to know how much is planted and unplanted, as a higher percentage of planted land means the company is fully utilising what it owns to produce as much crop as possible.

2. Upstream or downstream?

An upstream business is focused more on producing raw crops from the land, while a downstream business is focused on refining raw crops into higher-value products and selling them to consumers.

Both types of businesses have pros and cons. An upstream company makes more money if prices are high for raw crops and commodities, but suffers from low-profit margins due to its need to invest in a lot of land.

A downstream company can sell higher-value products with higher profit margins from branding and marketing, but this margin could be reduced if the prices of raw crops and materials increase.

3. Analyse the yield

Yield is an important metric to measure the performance of a plantation company. Fresh Fruit Bunch (FFB) yield is the measure to look out for when looking into palm oil plantations.

FFB refers to the raw fruit of the palm tree that is converted into crude palm and kernel oils. Typically, a mature palm oil estate generates yields of 18 to 30 tonnes per ha in a given year.

Every palm oil plantation company publishes FFB yield data in its quarterly and annual reports. Objectively, those with high FFB are preferred as it indicates they are efficient at producing fresh yields from their existing land.

That said, it could be the case that the company has low FFB yields because it has more immature land that might generate higher yields in the future. You could start investing in them now to reap higher profits next time.

4. Determine the company’s customers

It is important to know where the company generates revenue from, and how this is affected by other countries. If the company relies heavily on a few countries for revenue, you need to conduct due diligence on the demand from these countries as events there could impact the financial performance of the company.

Palm oil companies mainly export overseas, with their biggest customers being China and India. Other notable countries that import palm oil from Malaysia include Netherlands, Pakistan, Philippines, Turkey, and the United States.

It is always best if the company diversifies and sells its palm oil to multiple countries so it will not be heavily affected if sales to one country drop, such as what happened in 2020 with India’s boycott of Malaysian palm oil.

5. Examine its financial performance

You should examine a company’s historical financial performance. Look for the basics such as revenue growth and profit margins, and consider examining its balance sheet and cash flow position.

In terms of revenue growth, look for a company that has consistently grown at a rate of 3-5% every year. Anything below this means the company’s prospects are declining.

Seek out organisations with steady profit margins of around 10-20%. If its margins are volatile – for example, 30% this year, 2% next year – it means there are many uncertain elements, and you might want to give this company a miss.

6. Certification

Being a plantation company in today’s world isn’t easy as agricultural-based companies depend on natural resources such as land, soil, and raw food products, leading to sustainability concerns.

Investors are increasingly leaning towards Environmental, Social and Governance investing. It’s no longer just about profit, but profit that comes from a sustainable base and has minimal impact on the environment.

There are two certifications for palm oil industries you should look out for that ensure the company adheres to environmental and sustainability standards. The Roundtable on Sustainable Palm Oil (RSPO) certification is considered the gold standard, while the Malaysian Sustainable Palm Oil (MSPO) certification is also decent.

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.