Bumitama Agri - UOB Kay Hian 2016-03-23: Highly Leveraged To Rising CPO Prices

SGinvestors.io

BUMITAMA AGRI LTD P8Z.SI 

Bumitama Agri (BAL SP) - Highly Leveraged To Rising CPO Prices 

• BAL should outperform peers in this cycle, given its ability to deliver strong earnings growth supported by FFB production growth and higher CPO prices. 
• BAL’s large newly mature areas and prime age profile will offset the weaker FFB yield due to the dry weather in 2015. 
• BAL’s earnings are highly leveraged to CPO prices: every 10% rise in our base ASP will lift EPS by 22%. 
• Maintain BUY. Target price: S$1.10. 

WHAT’S NEW 

 Catching up. 

• Bumitama Agri’s (BAL) share price performance is finally catching with peers’ and is moving in tandem with rising crude palm oil (CPO) prices. 
• Ytd, BAL’s share price has risen 31.2% (but still down 7.5% yoy) but we still see further upside, supported by its strong earnings growth of 27% for 2016 and 19% for 2017. 

 Strong earnings growth yet to be reflected in valuation. 

• The earnings growth in 2016- 17 is well supported by FFB production growth of at least 8-12% and higher CPO ASP. 
• Despite the strong price performance, BAL is still one of the cheapest plantation companies with a planted landbank of more than 100,000ha. 
• BAL is currently trading at 12.7x 2016F PE and 10.6x 2017F PE vs peers’ 15-17x 2016F PE. 

 Highly leveraged to CPO prices. 

• CPO prices have been trending up since Dec 15 to a recent high of RM2,712/tonne (3-month futures contract). 
• We expect CPO ASP to rise 16% yoy in 2016 (2015: RM2,154/tonne). This will benefit BAL greatly, given its ability to deliver positive FFB production growth. 
• For every 10% increase in CPO prices from our base case, our EPS forecast would increase by 22%. 

 Production growth well supported by young areas. 

• BAL is able to deliver an 8% FFB production growth, mainly supported by: 
  1. prime-age oil palm trees (30% of total planted area) which can withstand dryness better than young and older trees, 
  2. another 15,000ha (12% of mature area as at end-15) of planted areas moving into mature age of 4, and 
  3. 14,000ha of young mature area (17% of prime area) entering prime production age. 

 Maintains high OER despite high intake of third-party fruits. 

• BAL is still able to deliver one of the best oil extraction rates (OER) of 22.9% in 2015 (2014: 23.2%). This is worth highlighting despite close to one-third of its total processed FFB were from third-party purchases, which usually give lower OER due to lower harvesting standards. 

STOCK IMPACT 

 Growth in next 3-5 years supported by an attractive age profile. 

• Another 16,000ha of planted areas will move into production age. Together with those planted in 2010-14 (estimated 60,000ha or 37% of total planted area), they should contribute to the high production growth in the next 3 to 5 years. 
• The smaller new planting since 2014 will only affect production growth beyond 2019-20, but by then, BAL should have become a large plantation company with strong cash flow. 

 Acquiring nearby estates to have better synergies. 

• Since 2014, BAL has slowed down its new planting substantially. To sustain growth, BAL is now looking to acquire nearby estates for better operational synergies. 
• In Dec 15, BAL acquired PT Inti Sawit Lestari (ISL) for Rp160b. ISL has land titles (Hak Guna Usaha or HGU) of 11,528ha with 4,464ha planted. This acquisition allows BAL to have direct access to ports, thus saving logistics time and cost. ISL has been selling its FFB production to BAL’s mill for processing. The planted areas comprise mostly old trees and will be replanted after studies on the high carbon stock (HCS) and high conservation value (HCV) are completed. 
• We should see more of such acquisitions by BAL. 

 A small beneficiary of Indonesia’s biodiesel tender. 

• BAL is relatively more conservative in terms of new ventures. 
• For its biodiesel, BAL started with only a small annual capacity of 20,000mt. It was given 20,074mt of biodiesel contracts to supply to Pertamina to from Nov 15 to Apr 16. We understand this volume will be renewed for the next six months (May to Oct 16). 
• Biodiesel made its maiden revenue contribution of Rp73b (1.3% of total revenue) in 2015. Management will consider expanding capacity if the contracted volume is sustainable. A biodiesel supplier in Indonesia should be able to make a profit as the pricing covers the costs of raw materials, processing and transportation. 

EARNINGS REVISION/RISK 

• We maintain our net profit forecasts for 2016-18 at Rp1,244b (+27.3% yoy), Rp1,482b (+19.1% yoy) and Rp1,592b (+2.5% yoy) respectively. 
• We forecast a 3-year FFB production CAGR of 12% and assume CPO prices at RM2,500/tonne, RM2,600/tonne and RM2,500/tonne for 2016-18 respectively. 

VALUATION/RECOMMENDATION 

 Maintain BUY and target price of S$1.10, based on 15x 2016F PE. 

• We like BAL for its young tree age profile, which spells strong production, as well as hands-on estate management to consistently deliver high OER. 

SHARE PRICE CATALYST 

 Surge in CPO prices. 

• BAL is highly leveraged to CPO prices. A surge in CPO prices will boost its earnings.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-23

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.10 Same 1.10