This article first appeared in The Edge Financial Daily, on October 22, 2015.

Far East Holdings Bhd

PAHANG-BASED Far East (Fundamental: 1.65/3, Valuation: 2/3) is primarily involved in the cultivation and production of palm oil. Its planted land bank of 21,239ha makes it one of the smaller players in the plantation industry and as an upstream company its profits are highly correlated with CPO prices.

We like Far East as it trades at a relatively inexpensive P/E of 14.27 and 0.91 times book. The company also sits in a strong net cash position of RM243.91 million or RM1.73 per share. This equates to 23.68% of its RM1.03 billion valuation.
Yield-seeking investors will like Far East due to its good track record of paying dividends. Since 2011, its payout ratio has averaged 45.62% and the company currently has a net yield of 4.12%.
As an upstream company, Far East was adversely affected by the weak CPO prices and drop in fresh fruit bunch (FFB) production. In 1HFY2015, net profit dropped 50.29% y-y to RM20.83 million on the back of a 35.7% drop in revenue to RM139.62 million. Coupled with a collapse in CPO prices in August, the stock has since retraced 12.41% from a peak of RM8.30 on June 25 to close at RM7.27 yesterday.
This could present investors with a good opportunity to invest in Far East, especially if the current rebound in CPO prices is sustainable. In addition, its large cash pile and relatively modest payout ratio should buffer against short-term earnings weakness and sustain its dividend yield moving forward.
Far East’s tree age profile should ensure steady FFB production moving forward. Only 28 % of its trees are old (more than 19 years) as compared with 41% that are in their prime, while the remaining 31% are young and immature. The company has a policy of replanting trees that are older than 25 years.
Moving forward, Far East has committed RM40 million for the purposes of acquiring land bank.