Bumitama Agri (BAL SP) - Listen, Implement And Deliver
- Key messages from the dialogue session with Bumitama’s CEO Pak Gunawan Lim:
- he will engage the investment community more to address investors’ concerns and the company’s outlook,
- upstream will remain the focus, and
- cash flow will be used to reduce bank borrowings, for potential M&A and higher dividend payout.
- The market should appreciate BAL’s transparency and its growth (3-year CAGR of 16%). Maintain BUY. Target price: S$1.25.
- We hosted a meeting with the CEO of Bumitama Agri (BAL), Pak Gunawan Lim, for clients to meet the CEO and be updated on his strategy for BAL as well as to hear him address clients’ concern over share liquidity.
More engagement with investment community.
- There will be more initiatives from the CEO to communicate directly with investors to hear their concerns and to share his growth strategy for BAL.
Acknowledge concern over trading liquidity.
- When share price is more reflective of BAL’s value and there is M&A opportunity, BAL will consider increasing share liquidity through rights issue. But there is no such plan for now.
Upstream to remain as core business.
- BAL’s focus will be on upstream operation.
- Biodiesel is just a small business and is not expected to grow aggressively. Any expansion on biodiesel will only come if there is a firm buyer for the additional volume.
- Management will not consider a big capex to build downstream capability even via a joint venture. At most, it will consider forming alliances with downstream players in terms of CPO supply.
Cash flow will be used to reduce bank borrowings first.
- BAL’s cash flow is expected to improve over the next few years on the back of good production growth (expecting 15- 20% for the next three years), low capex as new planting slows down significantly and on the back of good selling prices for palm products.
- BAL will use the cash flow to reduce bank borrowings and build up its war chest for any good upstream M&A, and for any potential higher dividend payouts in the future.
Getting more challenging to manage an oil palm plantation company.
- Sustainability is a major challenge to all oil palm plantation companies and BAL is committed to be one of the best in term of sustainability. As at 31 Dec 16, four of its mills were RSPO certified.
Other challenges faced by the company are weather, fire, social issues and theft.
- Management will focus on ensuring the team is ready and proactive to handle these issues. It will also spend more money and time in training its staff to run estates more efficiently so as to keep production cost low as the company has no control over selling prices as products are freely traded globally.
2017 production growth of 15% is a conservative guidance.
- We are expecting FFB production growth of 18.3% yoy in 2017, slightly higher than management’s expectation of 15% yoy.
- Management prefer to maintain its guidance (which we view as conservative) given that the lagged impact from the severe 2015 El Nino on FFB yield has not fully faded yet (third phase of impact: 20-22 months after the severe dry weather). Based on our estimates, BAL should be able to deliver mid-teens FFB production growth for at least the next three years.
- Maintain our net profit forecasts. We forecast 2017-19 net profits of Rp1,443b, Rp1,477b and Rp1,529b respectively.
- The flattish earnings for 2018 are due mainly to lower CPO prices (2018F: RM2,500/tonne, 2017F: RM2,600/tonne). BAL's earnings growth is well supported by production growth.
- 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 has allowed BAL to consistently deliver a high OER.
SHARE PRICE CATALYST
- Higher CPO prices and higher FFB production growth.