Bumitama Agri (BAL SP) - DBS Research 2017-08-15: In House Fruit Output Supported Profitability In 2Q17

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri (BAL SP) - In House Fruit Output Supported Profitability In 2Q17

2Q17 reported net profit after tax (NPAT) of Rp285bn (+165.8% y-o-y, +2%% q-o-q), largely in line with our and consensus estimates. The strong performance was driven by profitability improvements on q-o-q basis as seen in its gross and operating profit margin of 29% and 25% respectively.
The strong operational performance was led by the higher (nucleus) fruit contribution from BAL’s own estates (of 52% vs. 1Q17’s 49%) to total processed fruits of 497.7k MT (+90% y-o-y, +26% q-o-q). The higher nucleus fruit contribution was attributed by yield recovery in 2Q17 which means BAL can reduce sourcing third party fruits while maintaining its palm oil processing mills at optimum utilisation rate.

BAL booked revenue of Rp1.92tr (+39% y-o-y, -8% q-o-q), which was largely in line with our and consensus forecast. The strong y-o-y top line growth momentum was driven by BAL’s strong crude palm oil (CPO) and Palm Kernel (PK) output of 217.4m MT (+62% y-o-y, +16% q-o-q) and 42.8m MT (+62% y-o-y, +15% q-o-q) on the back of the higher processed fruits as we mentioned earlier, which was driven by yo-y yield recovery after the El Nino effect last year.
The realised average selling price (ASP) of both CPO and PK products followed the benchmark price trend, where ASP was weaker q-o-q due to lower global prices for both products in 2Q17 as a result of higher yields, and therefore output from trees.
BAL’s implied CPO and PK ASP were Rp8,057/kg (+4% yo-y, -5% q-o-q) and Rp5,556./kg (-13% y-o-y, -34% q-o-q) respectively.

We maintain our forecast at this point. We are expecting steady revenue performance on stronger output in 2H17 as CPO output tends to be stronger in the second semester of the year.
We are expecting third-party fruits contribution to slightly increase in order to maximize the mills’ utilisation rate.
Our earnings forecast implies 6% earnings CAGR in FY16-19F supported by BAL’s efficiency initiatives and crop yield expansion.

Higher milling capacity outlook is positive for BAL’s profitability. We forecast BAL will increase its third-party FFB purchases to achieve a utilisation rate of 68% for its mills. Moreover, we believe aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers, with double-digit fruits output outlook.
We forecast 11% CAGR in FFB (Fresh Fruit Bunch) output (including smallholder estates) between FY16 and FY19F.

We believe there is currently an excessive liquidity discount placed on the counter.
Moreover, higher CPO yield on upcoming maturing trees will improve company’s ROIC and profitability, resulting in consistent earnings delivery.

With no changes made to our earnings forecast, we maintain our Buy rating with discounted cash flow (DCF) based fair value of S$0.94/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, β: 0.8, TG: 3%) offering c.36% potential upside from the current level.
Our TP implies FY18F PE of 13.7x.

William Simadiputra DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-08-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.94 Same 0.94