Bumitama Agri - Buy On Inexpensive Valuations
- We upgrade Bumitama to BUY (from Neutral).
- Despite our expectation that CPO prices would be on a downtrend from hereon – given the abundant supply coming into the market in 2H17 – we believe its strong 3-year CAGR FFB growth of 17% would help offset some of this impact. In addition, valuations are now at more attractive levels, trading way below its historical mean.
- Our TP remains relatively unchanged at SGD0.89, (from SGD0.88, 11% upside) based on 13x 2017F P/E (+1SD below its mean) and EV/ha of USD9,000, below its peers of USD10,000-15,000.
CPO prices on downward trend.
- We believe CPO prices would be on a downtrend from hereon. This is given the abundant supply of CPO coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April onwards.
- Demand continues to be sluggish, and is not expected to recover to previous levels of growth of 5-6% pa, despite the current still relatively low stock levels in Malaysia and Indonesia.
Market is forward looking.
- We believe the market is forward looking and investors should therefore look to lock in profits. CPO prices have already started to moderate from highs of MYR3,300/tonne in January to MYR2,900/tonne currently. The price gap between CPO spot and futures prices widened to MYR200/tonne (from MYR80/tonne a few weeks ago), while the price gap between CPO and soybean oil prices widened back to around USD60/tonne currently (from USD13/tonne a month ago).
- While the price premium between soybean oil and CPO is still far from historical averages of USD100-150/tonne, we believe there is still room for the premium to widen.
Demand – not likely to recover in 2017.
- While the story about the supply recovery is well known, there has also been expectations that demand would make a comeback in 2017. However, we believe this is not to be, with the global economy still struggling to grow and domestic consumption still at sluggish levels.
- Therefore, despite the fact that inventories of CPO at the importing countries are at low levels currently (2.2m in India vs 2.8-3m tonnes normally; and 5.1m in China vs 6-7m tonnes normally), we do not expect restocking to occur in a significant manner in the coming months.
- Given the height CPO prices had achieved in the first two months of 2017, we raise our CPO price forecast for 2017 to MYR2,600/tonne (from MYR2,500/tonne). However, we lower our price assumption for FY18 to MYR2,400 (from MYR2,500) to account for our expectation that prices would continue to be weak.
- We have also adjusted our forecasts for higher PK/PKO prices and latest in-house exchange rate assumptions.
- All in, our forecasts were raised by 4.8% for FY17, but lowered by 2-4% for FY18-19.
Upgrade to BUY.
- Despite the weaker CPO price trend, we believe that Bumitama Agri’s (Bumitama) FFB output growth of strong double-digits for the next few years would help offset the negative impact.
- In addition, valuations are now attractive, trading below historical mean of 14.5x.
- We raise our TP slightly to SGD0.89, based on 13x 2017 P/E (+1SD below its mean), which implies an EV/ha of US9,000/ha, below its peers of USD10,000-15,000/ha.