This article first appeared in The Edge Financial Daily, on October 23, 2015.

United Plantations Bhd

SHARES for United Plantation (UP) (Fundamental: 1.95/3, Valuation: 1.1/3) have held steady over the past few months, despite the broader market selloff. The stock currently trades at a trailing 12-month P/E of 19.9 times and 2.6 times book. By comparison, large plantation companies such as Kuala Lumpur Kepong and IOI Corp are trading at a trailing P/E of 28.5 to 163.5 times, and 2.8 and 5.4 times book.

We like UP for its steady dividends, diversified income stream and growth prospects from its tree aging profile.

Last year, dividends totalled RM1.65 per share, inclusive of a extraordinary dividend of 75 sen. Excluding this, dividend yield would be 3.4%. We believe this is sustainable, supported by net cash of RM703 million at end-June, or RM3.38 per share — about 13% of its market capitalisation.

Unlike the companies we have featured over the past week, UP operates in both the upstream and downstream industries, with a total planted oil palm land bank of 45,421 hectares (ha) — comprising 35,766 ha in Peninsular Malaysia and 9,655 ha in Kalimantan, Indonesia.

The company’s 50%-owned refinery, Unitata, further processes the crude palm oil (CPO) into end products. Its refinery segment contributes about 60% of revenue, and 8% of segmental profits. Apart from cultivating oil palms, UP also uses 10% of its Malaysian plantations to plant coconuts.

Some 83.5% of UP’s total palms are mature, with 65% between 4-18 years old, which should provide for stable fresh fruit bunch production. In addition, its immature palms in Malaysia, totalling about 16%, would underpin future growth and cushion the effects of UP’s replanting programme, the bulk of which will be completed by 2017.

For 1H2015, revenue fell 3.8% y-y to RM489.6 million due to lower average selling prices of CPO and palm kernel (PK). Net profit, however, fell by a smaller 2.1%, thanks to higher production and lower production costs of CPO, PK and coconuts. The company also recognised a non-recurring gain of RM9.9 million arising from land acquisition by government authorities in relation to the West Coast Highway.