Based on the financial data and the teachings of Warren Buffett, United Plantations Berhad is not just a good company, but it exhibits many of the characteristics of a great company.
Let's analyze it using the Buffett's framework of "Great, Good, and Gruesome" companies.
The "Gruesome" Company
A "gruesome" company is one that:
Has low and inconsistent profit margins.
Earns a poor return on equity (ROE).
Requires constant heavy capital investment to stay afloat (low free cash flow).
Operates in a highly competitive industry with no moat, leading to poor pricing power.
Verdict for United Plantations: NOT Gruesome. The data is the complete opposite of this description.
The "Good" Company
A "good" company is one that is often mistaken for a great one. It's characterized by:
Rapid Growth in a "Hot" Industry: The stock is often popular and in the news.
High Price: Because it's popular, it typically sells at a very high Price-to-Earnings (P/E) ratio.
Volatile Performance: Its success is often tied to the overall industry cycle. In the commodity sector, a "good" company does well when prices are high but struggles when they fall.
Verdict for United Plantations: More than just "Good". While it is in a commodity (palm oil) industry, which is cyclical, its financial performance shows a resilience and quality that transcends a typical cyclical "good" company.
The "Great" Company
This is the type of company Buffett seeks. It has a durable competitive advantage or a wide "economic moat." Key characteristics include:
Consistently High Profit Margins: The company has pricing power and cost control.
Consistently High Return on Equity (ROE): The company generates high profits without needing to constantly reinvest massive amounts of capital. It can fund growth from its own earnings.
Strong Free Cash Flow: The business is a cash machine.
Understandable Business: It operates a simple, predictable business model.
Long-Term Outlook: Management retains earnings to reinvest at high rates of return, compounding value for shareholders.
Analysis: Why United Plantations is a Great Company
Based on the TTM data we calculated, United Plantations scores exceptionally well on the key metrics for a "great" company:
1. Consistently High and Expanding Profit Margins:
Its TTM Net Profit Margin has not only been high but has expanded from around 27% in 2014 to over 35% recently.
This is a classic sign of a durable competitive advantage. It means the company can command premium prices for its products, control its costs superbly, or both. In a commodity business, this is rare and indicates extreme operational efficiency and a possible focus on higher-margin products like specialty fats.
2. Extraordinarily High Return on Equity (ROE):
As we calculated, the ROE (using TTM EPS / NTA) is phenomenally high, often exceeding 200-250% in recent years.
While our specific calculation is influenced by the low carrying value of its assets (land), it unequivocally shows that the company is generating enormous profits relative to its accounting book value. This is the definition of a high-ROE business that Buffett cherishes. It can compound shareholder value at a very high rate.
3. Strong and Growing Earnings (The Cash Machine):
The CAGR for TTM Net Profit was 9.19% over 11.5 years, outperforming its revenue growth. This shows the earnings power is not just growing, but becoming more efficient.
The company has a long history of profitability through various cycles, demonstrating resilience.
4. Durable Competitive Advantage (The Moat):
Efficiency Moat: In a commodity business, the low-cost producer wins. United Plantations' ability to maintain and expand its profit margins while others struggle is a clear sign of a massive efficiency moat. They can produce palm oil more cheaply and effectively than competitors.
Reputation & Quality Moat: Their consistent performance suggests a focus on quality and reliability that builds long-term customer relationships.
The One Caveat (The "Good" Company Trap)
The only factor that prevents it from being a perfect, no-doubt-about-it "great" company like See's Candies is its industry.
It is still a commodity company. Its fortunes are somewhat tied to the global price of crude palm oil (CPO). While its margins show it handles downturns better than most, a severe and prolonged crash in CPO prices would still impact its earnings.
However, its performance within that cyclical industry is what makes it great. It's not just a fair-weather company; it's an exceptionally well-run business that has built a wide moat through operational excellence.
Conclusion
United Plantations is a Great Company.
It possesses the key financial hallmarks Buffett looks for: high and expanding profit margins, an enormous return on equity, and a demonstrated ability to grow earnings consistently over the long term. It has a clear and durable competitive advantage as a low-cost, highly efficient producer in its industry.
While an investor must always be mindful of the commodity price cycle, United Plantations has proven itself to be among the highest quality operators in the sector, worthy of the "great" designation.
======
Analysis and Interpretation
The CAGRs reveal a very strong and high-quality financial performance from United Plantations over the 11.5-year period:
Profitability Growth Outpacing Revenue: The company achieved a Net Profit CAGR of 9.19%, which is significantly higher than its Revenue CAGR of 6.22%. This indicates an impressive expansion in profit margins over the long term. The company has become more efficient at converting revenue into actual profit, likely through cost control, operational efficiencies, or a more favorable product mix.
Consistent Tax Rate: The fact that the PBT (Profit Before Tax) and Net Profit CAGRs are identical (9.19%) suggests that the company's effective tax rate has remained very consistent throughout this period, which adds predictability to its earnings.
Overall Performance: A near-double-digit annualized growth rate in earnings over more than a decade is a hallmark of a well-managed and fundamentally strong company, especially in a commodity-based industry like plantations.
Key Observations:
Exceptional Profitability: The TTM Net Profit Margins are exceptionally high, consistently staying above 24% for most of the last decade and recently reaching an impressive 36%. This is a hallmark of a highly efficient and profitable company.
Margin Expansion: There is a clear trend of margin expansion over the long term. Comparing the earlier periods (e.g., ~27-30% Net Profit Margin around 2014-2015) to the recent quarters (consistently above 35%) shows significant operational improvement and pricing power.
Extremely High ROE: The Return on Equity (ROE) figures are extraordinarily high. It is crucial to understand the reason:
The formula used (EPS/NTA) gives a Price-to-Book ratio equivalent, not a standard ROE. A standard ROE is Net Profit / Shareholders' Equity.
The calculated values (e.g., 273%) are possible but indicate that the company is generating profits many times its book value. This often happens when the market value (or the economic value) of its assets (like plantation land) is far higher than the historical cost recorded as NTA on the balance sheet.
The massive jump in ROE from 2020 onwards coincides with the capital change (share split) that significantly reduced the adjusted NTA per share, amplifying this ratio. This confirms that the company's assets are carried at a cost that is much lower than their true earning potential.
In summary, these metrics paint a picture of a company with world-class profitability and phenomenal returns on its accounting equity, driven by highly valuable assets and superb operational execution.
Dividend Payout Ratio (Based on Q4 TTM EPS)
Key Observations and Interpretation:
The DPO ratio tells a very clear story about United Plantations' dividend policy and financial performance over two distinct periods.
1. The High Payout Era (2015-2019):
During this period, the DPO ratio was consistently over 125%, even reaching nearly 200% in 2019.
A DPO over 100% means the company was paying out more in dividends than it earned in net profit for that year. This is often unsustainable for most companies.
Interpretation: This indicates that United Plantations was using its strong cash reserves (retained earnings from previous years) to fund dividends. This is a classic sign of a mature, cash-rich company with limited major reinvestment opportunities, choosing to return excess capital directly to shareholders. It signals a very shareholder-friendly management.
2. The Sustainable Payout Era (2020-Present):
Starting in 2020, there is a dramatic and consistent shift. The DPO ratio normalized to a band between 77% and 89%, with the exception of 2023.
A DPO in the 70-90% range is still very high but is generally sustainable as long as earnings are stable. It indicates the company is paying out most of its annual earnings as dividends.
Interpretation: This shift likely coincides with the capital restructuring (share split). The company may have decided to re-base its dividend policy to a high but more sustainable level linked directly to current-year earnings, rather than drawing down on past reserves.
The 2023 Anomaly: The 111.4% DPO in 2023 shows that the company was willing to pay a special "bonus" after an exceptionally profitable year (as seen in our TTM analysis), slightly exceeding that year's earnings.
Overall Conclusion:
United Plantations has transitioned from a policy of returning large, excess capital reserves to a policy of sustaining a very high, earnings-based payout. The current ~80% payout ratio is a clear commitment to shareholders, demonstrating that the company prioritizes returning profits while still retaining a portion for reinvestment and stability. This is the mark of a highly profitable company with a generous and thoughtful dividend policy.
Chart of 21.11.2025
In the long run, the stock market is a weighing machine.
It is better to buy a wonderful company at a fair price than a fair company at a wonderful price. (Warren Buffett)
No comments:
Post a Comment