DBS Vickers 2015-08-14: Bumitama Agri Ltd - 2Q15; Output yet to peak. Maintain BUY.


Output yet to peak 

  • 2Q15 earnings of Rp217bn were below expectations on annualised basis. 
  • Underperformance was caused by 14% y-o-y drop in CPO ASP, associate losses, and 16% y-o-y lower FFB yield. 
  • FY15F/16F earnings cut by 14%/12% on lower CPO ASP assumptions (relative to spot) and slightly lower FFB yields. 
  • Maintain BUY for 36% upside to revised TP of S$1.17; expect strong 3Q15 output to compensate weak CPO ASP. 

2Q15 earnings below expectations. 

  • Bumitama Agri (BAL) reported 2Q15 net profit of Rp217.7bn (-26% y-o-y; +20% q-o-q) – below our expectations on annualised basis. This brought 1H15 earnings to Rp398.7bn – representing 33% of our initial expectations. 
  • The weaker-than-expected 2Q15 earnings was attributable to 14% y-o-y lower CPO ASP (-4% q-o-q), losses from associates, and margin dilution due to 88% y-o-y jump in external FFB processed to compensate for deceleration in own production. 

Stronger output in 2H15. 

  • BAL produced 355kMT of own FFB (-5% y-o-y; +4% q-o-q) and 178k MT of CPO in 2Q15 (+15% y-o-y; +11% q-o-q), while smallholders FFB purchases rose 7% y-o-y (+15% q-o-q) to 170k MT. BAL booked FFB yield of 4.0 MT/ha for the quarter (vs. 3.9 MT/ha in 1Q15 and 4.8 MT/ha in 2Q14), while OER averaged 22.8% (declining slightly from 23.1% in 1Q15 given the jump in external FFB processed). However the group still guides FY15 FFB output growth of 20% - implying stronger 2H15 volumes. 

FY15F/16F earnings adjusted by -14%/-12% - imputing lower ASP relative to spot. 

  • The group’s total borrowings declined 2% qo-q to Rp3,586bn at the end of Jun-15 (from Rp3,646bn at the end of Mar-15) on debt repayments, which brought cash down by 63% q-o-q to Rp506bn. This translated to debt to total equity ratio of 74.1%, up from 61.5% at the end of last quarter. 
  • We understand amendments to IAS 41 (biological assets accounting) from 1 Jan-16 would clip the group’s equity through one-off adjustments, but we understand resultant net gearing ratio should remain below debt covenant of the group’s Sukuk. 

BUY call reiterated. 

  • After revisions, BAL’s DCF-based intrinsic value is now adjusted to S$1.17/share. This still offers 36% potential upside from current level. We expect CPO prices to recover next year on lower prospective soybean planted area, slower palm oil output growth, and ramp up of biodiesel off-take. 
  • We also expect 2H15 earnings to be boosted by lower fertiliser cost, as we understand the group had applied 70% of its FY requirement in 1H15.

Ben SANTOSO | http://www.dbsvickers.com/ DBS Securities 2015-08-14
BUY Maintain BUY 1.17 Down 1.26