Bumitama Agri (BAL SP) - 4Q16: Above Expectation, Strong Performance On Higher Palm Kernel Sales And ASP
- BAL’s 4Q16 earnings were above our expectation on stronger sales volume, higher palm kernel ASP and lower-than-expected depreciation.
- BAL not only registered the smallest decline in FFB production in 2016 among peers, its CPO sales volume rose in 2016.
- We forecast strong FFB production growth of 18.3% yoy in 2017, supported by new mature areas and a recovery in FFB yield.
- We maintain 2017-18 net profit forecasts. Maintain BUY. Target price: S$1.25.
Strong 4Q16 performance.
- Bumitama Agri (BAL) reported a net profit of Rp462m (+>100% qoq and yoy) in 4Q16. Excluding gains from fair value changes in biological assets and forex losses, core net profit was Rp497m for 4Q16 (+>100% qoq, +96.0% yoy) and Rp969m (+17.7% yoy) for 2016.
- The strong performance in 2016 was partly due to higher sales volumes on inventory drawdown despite lower production. Inventory fell to 30,000 tonnes as at end-16 from 69,000 tonnes as at end-15.
Results above expectation.
- The positive variance was mainly due to stronger crude palm oil (CPO) and palm kernel (PK) sales voumes (+73.7% qoq, +13.8% yoy), higher PK ASP (+8% qoq, +93.0% yoy) and lower-than-expected depreciation expense.
- BAL declared a final single-tiered dividend of 0.5 S cents for 2016 (2015: 1.5 S cents). This translates into a net dividend yield of 0.6%.
Record-high FFB production.
- Nucleus FFB production hit a record high in 4Q16, increasing 41.4% qoq and 10.0% yoy, and accounting for 36% of 2016 production. The strong FFB production was due to more new areas coming into maturity in 2016 despite the lower FFB yield of 14.6 tonne/ha (2015: 17.8 tonne/ha).
- Among peers, BAL registered the smallest decline in nucleus FFB production in 2016 (-4.1% yoy).
Strong FFB production growth in 2017.
- We are expecting FFB production to grow 18.3% yoy in 2017, slightly higher than management’s expectation of 15% yoy. The strong FFB production growth will come from:
- new mature areas (about 10% of total mature areas), and
- a recovery in FFB yield. Management expects 15,000ha of new areas coming into maturity in 2017.
- Assuming a conservative FFB yield of 4 tonnes/ha, FFB production will rise 3% yoy.
- Meanwhile, we think production growth of 15% yoy from existing estates is justifiable on the back of a recovery in FFB yield.
Stable biodiesel sales.
- For 2016, the biodiesel segment contributed 5% of total revenue (+17.7% yoy) with a gross margin of 7%. We understand the Indonesian government may reduce the biodiesel pricing to CPO+US$100/tonne from CPO+US$125/tonne currently.
- Management indicates the new pricing mechanism may squeeze its operation margins but is still profitable for BAL. As such, we expect biodiesel contracts will continue to provide stable earnings flow to the group.
Production cost to increase marginally yoy.
- Production cost is expected to increase 5% yoy in 2017. The increase will come mainly from more fertiliser application as more areas come into maturity although fertiliser prices are expected to be flat yoy.
PK prices are weakening.
- The strong 4Q16 results were partly due to higher PK sales and strong PK ASP. However, PK ASP has dropped 5% since Dec 16. Thus, we make no change to our PK price assumptions.
- We maintain our net profit forecasts for 2017 and 2018 at Rp1,443b and Rp1,477b respectively.
- We introduce 2019 net profit forecast of Rp1,529b (+3.5% yoy) on the back of FFB production growth of 10% and CPO price assumption of RM2,500/tonne (2018F: RM2,500/tonne).
- Maintain BUY and target price of S$1.25, based on 15x 2017F PE.
- We like BAL for its young tree age profile, which spells strong production, as well as its hands-on estate management which enables BAL to consistently deliver a high OER.
SHARE PRICE CATALYST
- Higher CPO prices and higher FFB production growth.