## A plantation’s value

February 18th, 2019

⏰ 2 minute read

⏰ 2 minute read

How much

It’s one of rhe most discussed topics, one of the most debated & perhaps one of the least well understood. Can you guess what it is? Yes. How much is a plantation worth? What is the basic value, how much would it cost to replace it today? This is also a topic where everyone has their own fixed idea. But are they right?

$

Let’s first have a look at what most investors think is the cost of building a plantation, what it’s replacement cost is & therefore what they think it should be worth today in the stock market. The first thing about this is almost everyone you ask thinks about the cost in terms of dollars instead of rupiah.

7k

The second question then is how many dollars they think it costs. The cost is almost always referred to in terms of cost per hectare, so to get the total you’d multiply that by the number of hectares, usually the nucleus hectares. What number? The one you most commonly hear is seven thousand dollars per hectare.

Why?

The third question here is why do they think that? Why is the number seven & not eight or ten & where do they get the number from? There’s no such thing as an ex factory or a commercial price label to reference like a consumer product. I’m guessing that the $7k is treated like a truth because someone heard it from someone else & so on. But is it true?

Capitalized

Is there a better way instead of word of mouth to calculate the replacement cost? Yes there is. As you know, when we build the plantation, the spending goes into Capex or investment cash flow & from there is capitalized into the balance sheet under long term assets. This continues until the plantation is mature & producing oil.

Depreciated

After four years, when the plantation is mature & the fruit is hopefully producing oil, all the spending which accumulated as a long term asset is depreciated over the remaining life time which is usually twenty years. This depreciation is minused from the value of the asset & also expensed in the income statement.

11k

You then know that the annual depreciation multiplied by twenty is the investment cost. In 2018 our depreciation was Rp650bn so Rp13tn total. As there were 121.4k mature nucleus hectares that’s Rp107m per hectare. Now if you’re clever, you just said AHA, that’s $7k! But the depreciation is from 1997 to today & the 22 year average Rp to $ is 10k. So Rp107m is almost $11k!

EV

How can we use this? Well of course investors use it to work out how much the value of a plantation company shares are. First they work out the enterprise value. That’s how much the whole plantation is worth or what the replacement cost is. To do that take the 11k & multiplybit by the total hectares. In our case 128k, so $1.4bn or Rp19.7tn (Rp14k to $).

Minus debt

The enterprise value is the total value of the company or how much you’d have to pay to buy it. Most people consider both the equity value which you can buy in the stock market & the value of the debt combined to be the total value. So, to get the equity value, take the enterprise value & minus the debt, our debt is Rp8.2tn, so that’s Rp11.5tn.

Divide by shares

Then to get the share price, you divide the equity value by the total number of shares. In our case, we have 31.5bn shares. That would give you a share price target of Rp365. Of course, if palm oil price is low, investors might not pay cost, but if its high, they’ll be willing to pay much more & when the debt comes down the equity value will go up ever higher.

More

You could also argue quite correctly that just because a plantation is mature does not mean it makes money, so you will have to keep investing making the cost of replacement much higher than $11k. We added a replcement cost valuation to the calculator, put in your target for EV per hectare & it will tell you what BWPT should be.

⬇️Try it out⬇️

Sebastian

It’s one of rhe most discussed topics, one of the most debated & perhaps one of the least well understood. Can you guess what it is? Yes. How much is a plantation worth? What is the basic value, how much would it cost to replace it today? This is also a topic where everyone has their own fixed idea. But are they right?

*What investors think*$

Let’s first have a look at what most investors think is the cost of building a plantation, what it’s replacement cost is & therefore what they think it should be worth today in the stock market. The first thing about this is almost everyone you ask thinks about the cost in terms of dollars instead of rupiah.

7k

The second question then is how many dollars they think it costs. The cost is almost always referred to in terms of cost per hectare, so to get the total you’d multiply that by the number of hectares, usually the nucleus hectares. What number? The one you most commonly hear is seven thousand dollars per hectare.

Why?

The third question here is why do they think that? Why is the number seven & not eight or ten & where do they get the number from? There’s no such thing as an ex factory or a commercial price label to reference like a consumer product. I’m guessing that the $7k is treated like a truth because someone heard it from someone else & so on. But is it true?

*What we know*Capitalized

Is there a better way instead of word of mouth to calculate the replacement cost? Yes there is. As you know, when we build the plantation, the spending goes into Capex or investment cash flow & from there is capitalized into the balance sheet under long term assets. This continues until the plantation is mature & producing oil.

Depreciated

After four years, when the plantation is mature & the fruit is hopefully producing oil, all the spending which accumulated as a long term asset is depreciated over the remaining life time which is usually twenty years. This depreciation is minused from the value of the asset & also expensed in the income statement.

11k

You then know that the annual depreciation multiplied by twenty is the investment cost. In 2018 our depreciation was Rp650bn so Rp13tn total. As there were 121.4k mature nucleus hectares that’s Rp107m per hectare. Now if you’re clever, you just said AHA, that’s $7k! But the depreciation is from 1997 to today & the 22 year average Rp to $ is 10k. So Rp107m is almost $11k!

*How to use*EV

How can we use this? Well of course investors use it to work out how much the value of a plantation company shares are. First they work out the enterprise value. That’s how much the whole plantation is worth or what the replacement cost is. To do that take the 11k & multiplybit by the total hectares. In our case 128k, so $1.4bn or Rp19.7tn (Rp14k to $).

Minus debt

The enterprise value is the total value of the company or how much you’d have to pay to buy it. Most people consider both the equity value which you can buy in the stock market & the value of the debt combined to be the total value. So, to get the equity value, take the enterprise value & minus the debt, our debt is Rp8.2tn, so that’s Rp11.5tn.

Divide by shares

Then to get the share price, you divide the equity value by the total number of shares. In our case, we have 31.5bn shares. That would give you a share price target of Rp365. Of course, if palm oil price is low, investors might not pay cost, but if its high, they’ll be willing to pay much more & when the debt comes down the equity value will go up ever higher.

More

You could also argue quite correctly that just because a plantation is mature does not mean it makes money, so you will have to keep investing making the cost of replacement much higher than $11k. We added a replcement cost valuation to the calculator, put in your target for EV per hectare & it will tell you what BWPT should be.

⬇️Try it out⬇️

Sebastian