Bumitama Agri - DBS Research 2017-11-14: Positive Y-o-y Improvement

Bumitama Agri - DBS Vickers 2017-11-14: Positive Y-o-y Improvement BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Positive Y-o-y Improvement

  • Bumitama Agri's 3Q17 NPAT slightly above our forecast 
  • Well-mixed own and external fruits supported margins 
  • Retaining our earnings forecast – expecting y-o-y recovery trend to continue in 4Q17 
  • Maintain BUY rating with TP of S$0.94.   


3Q17 earnings slightly above our forecast. 

  • Bumitama Agri (BAL) reported NPAT of Rp266.3bn (+29% y-o-y, -7% q-o-q) slightly above our/consensus estimates. 
  • The strong y-o-y earnings recovery trend continued in 3Q17 due to the rebounding nucleus estates' fruit production volume. The strong profitability performance was also attributed to its well-mixed own estates' and external fruits which brought more optimum margins. 
  • We retain our earnings forecast and TP at this point as we expect the strong performance to continue in 4Q17 and the market has not reacted to its positive performance trend.


Where we differ: Higher mill utilisation rate is positive for margins. 

  • Higher milling capacity outlook is positive for BAL’s profitability. We forecast BAL to increase its third-party FFB purchase to achieve milling capacity utilisation rate of 68%.
  • Moreover, we believe aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers, with doubledigit fruit output outlook of 11% CAGR in FFB (Fresh Fruit Bunch) output (including smallholder estates) between FY16F and FY19F.

Potential catalyst: Re-rating on performance delivery. 

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

Valuation

  • 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.

Key Risks to Our View

  • CPO price. There would be downside risk to our CPO price forecasts if the 2018 output grows beyond our expectation.
  • Stronger-than-expected yield across Indonesia and Malaysia may pressurise CPO price trend next year.



WHAT’S NEW 


Y-o-y earnings recovery trend sustained in 3Q17 

  • BAL reported NPAT of Rp266.3bn (+29% y-o-y, -7% q-o-q) slightly above our and consensus estimate. The strong y-o-y earnings recovery trend continued in 3Q17 due to the rebounding nucleus estates' fruit production volume which is also reflected on its lucrative top-line growth. 
  • A well-mixed processed fruit composition, coupled with relatively stable operational costs, helped BAL to maintain a strong profitability in 3Q17 despite the q-o-q lower average selling price (ASP) trend.
  • Revenue reached Rp2.0tr (+37% y-o-y, +7% q-o-q) on track to meet our/consensus forecasts. The revenue trend was supported by the strong CPO sales volume trend in the quarter at 217,367 MT (+39% y-o-y, +4% q-o-q), with realised ASP of Rp7,778 per kg (-1% y-o-y, -3% q-o-q).

The sales volume trend tracked BAL’s CPO output trend in 3Q17. 

  • CPO production volume reached 208,300 MT (+24% yo-y, -4% q-o-q). The strong y-o-y CPO output achievement was contributed by the higher external fruits of 925,000 MT (+23% y-o-y, -4% q-o-q) with a well-mixed between BAL’s own fruits with smallholders' and external fruits, which is also positive for its profitability performance.


Rating and Valuation : 


Earnings forecast unchanged – reiterate our BUY rating with TP of S$0.94.

  • Given the 3Q17 performance are within expectations, we retain our FY17/18 forecasts. We expected NPAT to grow by 17% y-o-y to Rp1.19tr in FY18 before increasing by a further 5% y-o-y to Rp1.25tr in FY19.
  • We also maintain our BUY rating with unchanged TP of S$0.94, which implies FY18F PE of 13.7x. We like Bumitama on its lucrative earnings growth outlook on yield improvement on maturing existing trees and upcoming newly matured trees.
  • We also witnessed a good estates management on the last site visit to its Central Kalimantan estates which strengthen our positive view on this counter on its good estate management.




William Simadiputra DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-11-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.940 Same 0.940



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