Bumitama Agri - UOB Kay Hian 2015-10-22: 3Q15 Results Preview: Hot Weather Making A Small Dent

BUMITAMA AGRI LTD P8Z.SI

Bumitama Agri (BAL SP) - 3Q15 Results Preview: Hot Weather Making A Small Dent

Bumitama reported 3Q15 FFB nucleus and CPO production growth of 15% and 21% yoy respectively.
9M15 production growth was below expectation as 3Q15 production pick-up was not as strong as expected due to the prolonged dry weather. Hence, we reduce our production growth forecasts for 2015-16 to 9% and 18% respectively, and cut our net profit forecasts by 11-18% for 2015-17.
Maintain BUY. Target price: S$1.10.

Bumitama Agri’s (BAL) production picked up in 3Q15 as expected but at a slower rate due largely to the prolonged dry weather since Aug 15. FFB production from nucleus areas was below expectation and CPO production was slightly below estimates as BAL purchased more external fruits to fully utilise its new mill.

We cut our net profit estimates by 11-18% for 2015-17 to factor in:
1. lower FFB production growth for nucleus areas of 9.3%, 18.3% and 11.8% (from 21.2%, 21.0% and 18.4%) respectively, and
2. higher purchases of external fruit to mitigate the drop in CPO production from nucleus areas.

We forecast 3Q15 net profit of Rp200b-230b (2Q15: Rp217.7b, 3Q14: Rp299.3b). The key data points to watch out for 3Q15 are:
1. lower average selling price as the export duty of US$50//tonne took effect since mid-Jul 15,
2. lower sales volume qoq despite higher production as 2Q15 sales volume was boosted by inventory drawdown, and
3. lower cost of production as the bulk of the fertiliser (about 70%) was applied in 1H15.

For 3Q15, total FFB production from nucleus areas was 383.443 tonnes, up 20% yoy and 7.2% qoq. The higher yoy growth was due to a lower base last year as production was affected by the dry weather. CPO production for 3Q15 grew by a slightly faster 20.8% yoy as BAL processed more third-party fruits (+29.1% yoy). The higher intake of third-party FFB was to fill up the milling capacity, especially the new mills in younger areas.
In 9M15, total nucleus FFB and CPO production increased 6.5% yoy and 17.2% yoy respectively. This was good growth vs its 1H15 growth of 2.4% and 15.4% yoy respectively.

We cut our 2015-17 net profit forecasts by 11%, 18% and 17% respectively as we adjust for lower FFB production growth in nucleus areas and higher external fruit purchases mitigate the drop in CPO production from nucleus areas.
We are aware of the change in accounting standard on the treatment of biological assets with the amendments to International Accounting Standard (IAS) 41 which will affect BAL’s book value and have a one-off impact on 2016 earnings. We have yet to incorporate this into our earnings forecasts. Management is likely to provide some guidance in the coming results briefing in mid-Nov 15.

We like BAL for its young tree profile, which means the company can deliver strong production as well as take on estate management to consistently deliver high OER.
Although BAL missed the guidance and expectations in terms of production growth, it is still expected to show a good production growth of 9-10% for 2015 and mid-teens growth in 2016 on a lower base. The shortfall is due to the adverse weather which has hit the industry and not due to management’s weakness.

BAL is highly leveraged on CPO prices, given its pure upstream exposure. A surge in CPO prices will boost its earnings.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-22

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.10 Down 1.35