Bumitama Agri - DBS Research 2017-02-24: Consistent earnings growth delivery

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BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Consistent earnings growth delivery

• Bumitama Agri (BAL)'s 4Q16 earnings slightly below on steeper translation FX losses.
• FY17F FFB output guided to expand 15% y-o-y.
• FY17F/18F earnings tweaked -3%/-3%.
• Maintain BUY call for 25% upside to unchanged TP.

Volume driven. 

• We expect the group’s earnings to expand 7% CAGR between FY16 and FY19F, driven by an 8% CAGR expansion in crude palm oil (CPO) production over the same period. 
• We reiterate our BUY call with a significant c.25% potential upside to our TP (unchanged). We believe there is currently excessive liquidity discount on the counter.

4Q16 earnings slightly below. 

• Excluding Rp54bn deferred tax credit and changes in fair value of biological assets (net of deferred tax), Bumitama Agri (BAL) booked 4Q16 earnings of Rp387.4bn (+95% y-o-y; +154% q-o-q) – slightly below Rp411.7 bn expected, mainly on the back of steeper translation FX losses for the quarter. 
• Imputing FY17F production guidance, expanded biodiesel capacity and FY16 results, we adjusted FY17F/18F earnings slightly by -3%/-3%.
• The counter’s DCF valuation remains unchanged at S$0.99, offering 25% potential upside from the current level.

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 (Fresh Fruit Bunch) output (including smallholder estates) between FY16F and FY19F.

Valuation

• 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%, : 0.8, TG: 3%) offering c.22% potential upside from the current level.

Key Risks to Our View

• There would be downside risk to our CPO (Crude Palm Oil) 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 the valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-02-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.990 Same 0.990