Bumitama Agri - Higher Fertiliser Application In 1Q17
- Bumitama’s 1Q17 earnings came in apparently lower-than-expectations, but that was due to a higher fertilisation activity which took place during the quarter, causing unit costs to spike by 32% YoY.
- We expect costs to decrease and normalise in the coming quarters, resulting in an overall 5% YoY increase.
- We continue to like Bumitama for its FFB growth trajectory, where we anticipate strong double-digit growth for the next few years, on the back of its age profile, which is hitting optimal levels.
- We maintain our BUY recommendation with an unchanged SGD0.89 TP.
- Bumitama Agri’s (Bumitama) 1Q17 core net profit came in at 18-19% of our and consensus’ FY17 forecasts. While this may seem lower-than-normal, management guided that production costs rose by 32% YoY in 1Q17, as Bumitama applied 56% of its yearly fertiliser requirement on its trees during the quarter.
- As fertiliser application will be lower in the coming quarters, we expect unit costs to moderate.
Strong 1Q17 FFB output.
- Bumitama recorded a strong FFB output growth of 25.5% YoY on the back of some 11,341ha of land that came into maturity in 1Q17. Management highlighted that the output for 2Q17F could be even stronger than that of 1Q17.
- Nevertheless, management is maintaining its guidance of 15% FFB output growth in FY17F, as it expects the growth to moderate in 2H17.
- Our forecasts, which we are leaving unchanged, point to a slightly higher growth of 17.4% YoY for FY17.
Costs to reduce in 2H17.
- Bumitama achieved a unit cost of IDR1,161/kg in 1Q17, up 32% YoY. This was on the back of a change in fertilisation strategy whereby the company will now apply the bulk of its fertiliser quantity in 1H of the year, with a smaller amount to be applied at the beginning of 3Q and none in 4Q. This would also help improve labour efficiencies as well as take advantage of the drier weather in the first half of the year. For FY17F, management is keeping its overall expectation of a 5% rise in unit costs YoY.
- Regarding biodiesel, Bumitama received an allocation of 15,344 kilolitres for the May-Oct period from Pertamina, which is a quantity lower by 14.8% than that in Nov 2016 – Apr 2017 which had an allocation of 18,000 kilolitres. Management thinks that it will still be profitable even with the new pricing structure (takes effect next month) as it is running at a utilisation rate of 55%.
- Key risks include the weather, as well as global supply and demand dynamics of edible oils. Bumitama is relatively sensitive to CPO price movements; every MYR100/tonne change, affects net profit by 5-6% pa, based on our estimates.
- We leave our forecasts unchanged as we expect Bumitama’s earnings to play catch-up in the following quarters on the back of lower unit costs.
- Our TP is unchanged at SGD0.89, which is based on 13x 2017F P/E and implies an EV/ha of USD10,000. This is at the low-end of its peers, which trade at the USD10,000-15,000/ha range and it is justified, given Bumitama’s relatively younger estates.
- In addition, its relative illiquidity remains a concern for investors, resulting in the discounted valuation vs peers.