Bumitama Agri - DBS Research 2016-11-15: Earnings yet to peak

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Earnings yet to peak

3Q16 earnings of Rp206.4bn were in line.
FFB output to pick up in 4Q16; guidance is for FY16 internal output to decline by a smaller 3%- 5%, from 5-10% previously.
FY16F/17F earnings trimmed by 4%/3%.
BUY rating reiterated for 24% upside.

Anticipated rebound in the group’s fresh fruit bunches (FFB) yields should drive Bumitama Agri (BAL) 2H16 earnings 44% higher than 1H16.
We expect the group’s earnings to continue to expand at 20% CAGR between FY16F and FY19F, driven by a 9% expansion in crude palm oil (CPO) production over the same period.
In this report, we reiterate our BUY call on the counter with a significant c.24% potential upside to our revised TP.
At the current price, we believe there is an excessive discount placed on the counter’s low liquidity.

BAL reported 3Q16 earnings of Rp206.4bn (+29% y-o-y; +92% q-o-q), in line with Rp203bn - Rp216bn range we anticipated. This brought 9M16 earnings to Rp543.5bn (+24% y-o-y), representing 64%/69% of our/consensus full year expectations.
The 25% sequential rebound in CPO output (-8% y-o-y) to 167.4k MT was not as strong as anticipated, as BAL did not procure enough external FFB to cover for the internal shortfall. However we understand output has rebounded strongly from October 2016, hence reducing the need for external FFB.
3Q16 CPO ASP expanded by 1% q-o-q (+16% y-o-y) to Rp7,823/kg, –10% below benchmark Astra Agro Lestari’s ASP due to dilution from forward sales.
We trimmed FY16F/17F earnings by 3%/4% to account for slightly lower CPO sales volume forecasts.

Aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers. This is forecast to deliver 11% CAGR in FFB output (including smallholder estates) between FY16F and FY19F.

We employed DCF valuation (FY17F base year) to arrive at BAL’s fair value of S$0.95/share (WACC: 12.6%, Rf: 8.1%, Rm: 15.0%, β: 1.0, TG: 3%) offering c.24% potential upside from current level.

There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year.
CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina.
Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-11-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.95 Down 0.990