Better Times In 2H15
- BAL reported marginal growth in FFB production in 1H15 due to unusually high production in 1H14 and the lagged impact from prolonged dry weather in 2H14.
- We believe the strong production growth in 2H15 will help BAL make up for the weak production in 1H15 and meet our full-year expectation of a 20% yoy growth in 2015.
- BAL’s 2Q15 net profit is likely to be slightly lower or flattish qoq and weaker yoy on lower CPO ASP and weak production growth.
- Maintain BUY. Target price: S$1.35.
WHAT’S NEW
• Production to catch up in 2H15.
- Bumitama Agri (BAL) reported 2Q15 fresh fruit bunch (FFB) production of 355,395 tonnes (+4.3% qoq, -4.5% yoy) and 1H15 FFB production of 696,155 tonnes (+2.4% yoy).
- Even though growth in 1H15 was significantly below our expectation of 20% yoy growth, we believe that 2H15’s production will allow BAL to catch up significantly in terms of production to meet our yoy growth expectation.
- The lower yoy production in 1H15 was partly due to the unusually high production in 1H14 as cropping patterns shifted, and the lagged impact from the prolonged dry weather in 2H14 in Kalimantan.
• Positive production growth even if El Nino occurs.
- Given the young age profile of its trees, and the large volume of newly matured areas, we believe that BAL can still deliver positive production growth even if El Nino occurs in late-3Q15.
- Recall that even when the 2011 dry weather affected 2013 production across Indonesia, BAL managed to deliver mid-teens growth for 2013 (vs industry level of 5.9%).
• Unexciting 2Q15 results.
- BAL will release its 2Q15 results on 13 August and is likely to report slightly lower or flattish qoq and a weaker yoy performance (2Q14: core net profit of Rp379b, 1Q15: Rp213b).
- Overall, the lower yoy and qoq CPO prices would affect its 2Q15 performance.
- However, its yoy performance would be further dragged by the decline in production growth.
STOCK IMPACT
• Growth in 1H15 was low due to the high base in 1H14.
- The shift in cropping patterns from 4Q13 to 1H14 had caused an unusually high level of production in 1H14, during which production accounted for about 49% of BAL’s 2014 full-year production, in contrast to the historical trend of 41-46%.
- Due to the high base in 1H14, together with the lagged impact from the prolonged dry weather in 2H14 in Kalimantan where 98% of its estates are located, BAL reported much lower production growth of 2.4% yoy in 1H15.
• Strong CPO production growth in 1H15.
- Despite weak FFB production growth in 2Q15 and 1H15, BAL reported double-digit CPO production growth during the period.
- This was mainly due to the higher fruit intake from third-parties to maximise the utilisation rate of its newly-commissioned mill.
- Its third-party FFB intake was up 24.8% qoq and 87.6% yoy to 256,739 tonnes in 2Q15.
- For 1H15, the volume of third-party FFB intake was up 69.9% yoy to 462,474 tonnes.
• Expect a strong pick-up in 2H15.
- Even though 1H15 production growth of 2.4% yoy was significantly below expectation of 20% for full-year 2015, we believe BAL can catch up significantly in terms of production in 2H15 to meet our expectation.
- Based on historical data, 2H15 tends to contribute to about 52-59% of full-year production.
- Production growth would be much stronger in 2H15 as we expect a pick-up in production after the current stress period and the low base in 2H14.
- If production growth comes in 5ppt below our expectation (ie 15%), our EPS forecast will decline by 6% to Rp569 in 2015.
• Highly leveraged on CPO prices.
- As a pure upstream plantation company, BAL stands to benefit from the rising CPO price trends in the event of a strong El Nino as it is sensitive to CPO price movements.
- For every 10% increase in CPO prices, BAL’s EPS would increase by 21% from our forecasted 2015 EPS.
• Depreciation of rupiah.
- BAL is likely to report unrealised forex losses due to the translation of US dollar-denominated borrowings as a result of the depreciation of the rupiah against the US dollar in the period. About 95% of its loans are US dollar denominated.
- The US dollar appreciated 13% yoy in 2Q15 against the ringgit and the rupiah respectively (+0.9% and +2.4% qoq). This could be partially offset by the potential forex gains from its US dollar time deposit.
EARNINGS REVISION/RISK
- No change to our earnings forecast.
VALUATION/RECOMMENDATION
• Maintain BUY and target price of S$1.35, based on 15x 2016F PE.
- We like BAL for its young age tree profile, which means that the company can deliver strong production as well as take on estate management to consistently deliver high OER.
- In the event of El Nino, its sector valuation would usually expand closer to 1SD above its mean valuation.
- Based on a re-rated valuation, the implied target price is S$1.79, and there will be a potential upside of 83% to BAL’s share price.
SHARE PRICE CATALYST
• Surge in CPO prices.
- BAL is highly leveraged on CPO prices. A surge in CPO prices will boost its earnings.
(Singapore Research Team; Chan Yuan She)
Source: http://research.uobkayhian.com/
