Bumitama Agri - Strong growth ahead
Poised for strong earnings rebound.
- Anticipated rebound in the group’s fresh fruit bunches (FFB) yields should drive Bumitama Agri's (BAL) 4Q16 earnings 99% higher q-o-q. We expect the group’s earnings to expand at a 10% CAGR between FY16F and FY19F, driven by a 9% expansion in crude palm oil (CPO) production.
- We reiterate our BUY call with a significant c.22% potential upside to our revised TP. We believe there is currently excessive liquidity discount on the counter.
FY16F/17F/18F earnings revised by +16%/+36%/+5%.
- Changes in our forecasts mainly reflected +6%/+10%/0% revisions to our CPO ASP (in Rupiah terms).
- We also adjusted FY17F/18F CPO output each 3% lower; as we impute 9% and 7% lower external FFB respectively, based on 3% lower mill utilisation rates vis-à-vis previous forecasts.
- Margins and free cash flow are hence forecast to improve over the long term – yielding a higher DCF valuation.
Drop in planting not impacting medium-term volume growth.
- Aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers. This is forecast to deliver an 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$0.99/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, β: 0.8, TG: 3%) offering c.22% potential upside from current level.
Key Risks to Our View
- 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.