Bumitama Agri - RHB Invest 2015-10-21: Raising CPO Prices On Strong El Nino

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BUMITAMA AGRI LTD P8Z.SI 

Bumitama Agri - RHB Invest 2015-10-21: Raising CPO Prices On Strong El Nino

• We believe the El Nino’s impact on edible oil supply will be the largest ever given its current strength. Hence, we are raising our CPO price estimate for 2016 to MYR2,700/tonne (from MYR2,500). 
• Maintain BUY with our TP reduced slightly to SGD1.42 (71% upside), based on 17x 2016 earnings, as we factor in additional depreciation impact. 
• Bumitama remains a cheap growth stock to own. 

 Unprecedented impact. 

• We believe the El Nino’s impact on edible oil supply will be the biggest ever given its strength and high global reliance on palm oil. In the last mild El Nino in 2009-2010, palm oil price went ballistic as production stagnated. Given that the current episode is a strong one and could match the 1997-1998 El Nino, the impact on production will be more severe with Indonesia potentially experiencing a decline in production next year. 
• Unlike the last two episodes, there will be little or no mitigating factor from an increase in oil palm hectarage since Indonesia’s new planting has been slowing in the past few years. 

 Production expectations. 

• We expect Bumitama Agri’s (Bumitama) relatively young age profile to help cushion the impact of drought, but its 2016 growth rate will likely be lower at 11% vs its usual 20-30% rate. 

 Earnings revision. 

• We are raising our 2016 average CPO price assumption to MYR2,700/tonne from MYR2,500/tonne previously, and lifting 2017 average to MYR2,750/tonne from MYR2,600/tonne previously. 
• Nevertheless, we trim our FY16 earnings forecast by 7.1% to IDR1,396bn as the increase in CPO price is more than offset by the depreciation of biological assets amounting to IDR351.6bn per year due to a change in 2016 accounting standards. 
• We introduce our FY17 earnings forecast at IDR1,506bn. 

 CPO price sensitivity. 

• A MYR100/tonne rise in CPO price could boost FY16F/FY17F net earnings by 7.8%/9.7% respectively. 

 TP revision. 

• We expect CPO prices to rally throughout 2016, resulting in an expansion in P/E multiple. 
• We raise our target P/E for Bumitama to 17x from 16x previously, resulting in a revised TP of SGD1.42 (from SGD1.44). 

Singapore Research RHB Research | http://www.rhbinvest.com.sg/ 2015-10-21

RHB Research SGX Stock Analyst Report BUY Maintain BUY 1.42 Down 1.44