Bumitama Agri - RHB Invest 2017-12-19: Adjusting For Higher CPO Price Assumptions

Bumitama Agri - RHB Invest 2017-12-19: Adjusting For Higher CPO Price Assumptions BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Adjusting For Higher CPO Price Assumptions

  • We believe that downside risks for CPO prices would not be significant from here on. Prices have already fallen 27% since Feb 2017, as the market has priced in the output recovery post-El Nino. However, we do not expect prices to bounce back strongly either given the weak demand dynamics and still high inventory levels. 
  • Our CPO price estimates are raised to MYR2,550/tonne for 2018 (-9% YoY) and MYR2,700 for 2019 (+6% YoY). 
  • We like Bumitama for its double-digit FFB growth and inexpensive valuations. Maintain BUY with a SGD0.95 TP (28% upside).



We believe that downside risks for CPO prices would not be significant from here on. 

  • While we continue to expect CPO output to grow, particularly in certain parts of Malaysia, where recovery has been slower, we believe much of this has been priced in already to CPO prices. 
  • CPO prices fell from a high of MYR3,348/tonne in Feb 2017 to a low of MYR2450/tonne in Nov 2017, and is currently hovering at these low levels.


For 2018, we believe CPO prices are likely to remain relatively range bound

  • For 2018, we believe CPO prices are likely to remain relatively range bound between MYR2,400-2,700/tonne, but lift our average price assumptions to MYR2,550/tonne (from MYR2,400/tonne), while for 2019, we lift our prices to MYR2,700 (from MYR2,500). 
  • We expect the growth in CPO output in both Malaysia and Indonesia to slow down in 2018, from the estimated 12% and 21% YoY jump, respectively in 2017. 
  • Given the seemingly delayed CPO production peak season in Malaysia in 2017, it is likely that part of the peak season would overflow into 1Q18. This could result in Malaysia recording CPO output growth of 5-7% in 2018F. 
  • Indonesia, however, seems to have hit its peak already in Oct/Nov 2017, which means the production cycle has normalised somewhat, resulting in CPO output growth of 3-5% for 2018F.


Strong FFB growth to continue over the next few years. 

  • Bumitama is expected to post a strong FFB growth of 23% in FY17,on the back of a recovery from El Nino. 
  • For FY18-19, we expect FFB growth to continue in the double-digits, at 16-18% YoY. This is on the back of 3,800ha of new land coming into maturity in 2018 and 6,700ha in 2019 (from 14,500ha in 2017), and an increase of 15,000 ha in prime areas over the next four years.


Margins to improve as more nucleus landbank matures. 

  • We expect overall margins to improve going forward, as more of the fruits processed are sourced from its nucleus estates. 
  • Management estimates GPM on FFB sourced from nucleus estates to be about 50%, while GPM of plasma estates ~20%, followed by external fruits at 15%. Currently, 50% of the fruits processed are from its nucleus plantations, while 23% (plasma), and 27% (external sources).


Maintain BUY. 

  • We raise earnings by 7-14% for FY18F-19F post CPO price revision. Our TP of SGD0.95 is maintained, however, we apply a lower target P/E of 11x (from 12x) in line with the shrinkage of sector peer valuations. This implies an EV/ha of USD10,000, at the low end of its peer range – its peers trade between USD10,000-15,000/ha. 
  • Valuations remain undemanding at current price levels, with its FY18F P/E averaging around 9x-10x, vs its historical averages of 11x-12x, while the current EV/ha of USD7,700/ha is even below replacement values of USD8,000-10,000/ha.




Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.950 Same 0.950



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