’Let freedom! Be your battle cry...’
Free Cash Flow
February 7th, 2018
⏰ 2 minute read
⏰ 2 minute read
Count on 2 hands
Free cash flow is the holy grail of investing. In plantations it takes a long time to get it. It took us 20 years! & up to September last year, you could count the number of quarters we achieved this holy grail on one hand. But now as a sneaky peak into our not yet released 2018 results....,you need 2 hands.
What is it
Operations
First. What is free cash flow? The cash flow statement is often overlooked because it’s at the back of the financial statements, but that makes it even more worth reading. In fact it’s the only part of the financial statement I really follow. The first part of our cash flow is operating cash flow.
Investment
This number covers the money in & the money out for our mature plantations. Money in is selling oil kernel & fruit. Money out is paying suppliers, staff, interest & tax. Then comes investment cash flow. This is normally money out spent on immature plantations & mills. There can be money in from repayments from plasma for earlier investments.
Free
The ‘free’ cash flow is the cash flows from operations & investment added together. This covers all the money we make (or lose) as a company. For plantations free cash flow is very negative when the plantations are young, then eventually it becomes positive when the plantations age & pay back on their investment.
Why it’s important
Cash
Why is free cash flow so important that it’s our ‘holy grail’? Because it’s money that is now free for us to do what we want with it. As with most freedoms we now have some degree of choice. We could keep it as cash, meaning we don’t do anything with it except put it on bank deposit
Debt
But in our case it’s not entirely free because we do have certain obligations to the banks which lent us the money to invest in the plantations. We could borrow more money to pay these obligations, meaning we could still keep the cash, but more likely we will use the free cash to pay any bank loans we have.
Shareholders
There’s another choice. We could give the money to our long supporting shareholders. There’s no obligation to pay shareholders, but there is an understanding you will if you can. We could either use the free cash to pay a dividend of cash directly to the shareholder or we could buy back our shares from them. These choices are the reasons free cash flow is great:
EHP free cash
Build up
How has free cash flow affected EHP? As mentioned before, we went for 20 years without it. When you don’t have free cash flow you need to get money from banks or shareholders & we did both. We raised a lot of money, at the peak, up to Rp9tn of debt. Plus an IPO & a rights issue of equity.
Positive
As our investment slowed down & our young plantations came to maturity, our negative cash flow declined. By the end of 2016 & Into 2017 it finally turned positive & was positive for that year. With free cash flow we were able to reverse the debt increase & finally for the first time start to pay it. A great feeling!
Stall & recovery
But the free cash flow was small & unfortunately with low production in early 2018, it turned negative again & for the whole first half of the year. Not a great feeling. Was that it? Was it over? No. With strong production & even despite very weak selling prices, positive free cash flow returned in both the 3 & now 4th quarters & the year. 6 quarters of free cash flow = 2 hands.
Just the beginning
As you probably know it’s often like that right? At turning points things are still delicately balanced at first. But with higher prices & a higher production maintained, EHP’s free cash should become stronger & bigger giving us more choices, confidence & ultimately rewards for our investors for many years to come.
Free cash flow is the holy grail of investing. In plantations it takes a long time to get it. It took us 20 years! & up to September last year, you could count the number of quarters we achieved this holy grail on one hand. But now as a sneaky peak into our not yet released 2018 results....,you need 2 hands.
What is it
Operations
First. What is free cash flow? The cash flow statement is often overlooked because it’s at the back of the financial statements, but that makes it even more worth reading. In fact it’s the only part of the financial statement I really follow. The first part of our cash flow is operating cash flow.
Investment
This number covers the money in & the money out for our mature plantations. Money in is selling oil kernel & fruit. Money out is paying suppliers, staff, interest & tax. Then comes investment cash flow. This is normally money out spent on immature plantations & mills. There can be money in from repayments from plasma for earlier investments.
Free
The ‘free’ cash flow is the cash flows from operations & investment added together. This covers all the money we make (or lose) as a company. For plantations free cash flow is very negative when the plantations are young, then eventually it becomes positive when the plantations age & pay back on their investment.
Why it’s important
Cash
Why is free cash flow so important that it’s our ‘holy grail’? Because it’s money that is now free for us to do what we want with it. As with most freedoms we now have some degree of choice. We could keep it as cash, meaning we don’t do anything with it except put it on bank deposit
Debt
But in our case it’s not entirely free because we do have certain obligations to the banks which lent us the money to invest in the plantations. We could borrow more money to pay these obligations, meaning we could still keep the cash, but more likely we will use the free cash to pay any bank loans we have.
Shareholders
There’s another choice. We could give the money to our long supporting shareholders. There’s no obligation to pay shareholders, but there is an understanding you will if you can. We could either use the free cash to pay a dividend of cash directly to the shareholder or we could buy back our shares from them. These choices are the reasons free cash flow is great:
EHP free cash
Build up
How has free cash flow affected EHP? As mentioned before, we went for 20 years without it. When you don’t have free cash flow you need to get money from banks or shareholders & we did both. We raised a lot of money, at the peak, up to Rp9tn of debt. Plus an IPO & a rights issue of equity.
Positive
As our investment slowed down & our young plantations came to maturity, our negative cash flow declined. By the end of 2016 & Into 2017 it finally turned positive & was positive for that year. With free cash flow we were able to reverse the debt increase & finally for the first time start to pay it. A great feeling!
Stall & recovery
But the free cash flow was small & unfortunately with low production in early 2018, it turned negative again & for the whole first half of the year. Not a great feeling. Was that it? Was it over? No. With strong production & even despite very weak selling prices, positive free cash flow returned in both the 3 & now 4th quarters & the year. 6 quarters of free cash flow = 2 hands.
Just the beginning
As you probably know it’s often like that right? At turning points things are still delicately balanced at first. But with higher prices & a higher production maintained, EHP’s free cash should become stronger & bigger giving us more choices, confidence & ultimately rewards for our investors for many years to come.
