Bumitama Agri - UOB Kay Hian 2016-05-06: Bunches Ready For Upcoming Harvest

BUMITAMA AGRI LTD P8Z.SI

Bumitama Agri (BAL SP) - Bunches Ready For Upcoming Harvest

After our visit to BAL’s estate in central Kalimantan, we are confident that FFB production will pick up in 2H16 and deliver positive growth in 2016.
In 1Q16, BAL’s FFB production was low due to the drought. However, the impact from the 2015 drought was partly mitigated as management had prepared for this event by undertaking measures to mitigate the impact.

During our site visit to Bumitama’s (BAL) estate – Windu Nabatindo Lestari (WNL), we noticed that there were 4-8 fresh fruit bunches (FFB) growing on the trees which were near ready for the next three months of harvesting as well as female flowers. This is an improvement compared with three months ago. Thus, we are still confident that BAL will be able to deliver positive production growth in 2016.
We are expecting FFB production growth of 7.9% for 2016, in line with management’s guidance, which would mark a great improvement from 1Q16’s FFB production which reported 7.2% yoy and 36.7% qoq declines.

BAL will be announcing its 1Q16 results on 13 May 16 before the market opens for trading. We are expecting 1Q16 contribution to be lower this year and contribute to about 12-14% of our full-year estimate of Rp150b-175b (1Q15: Rp181.6b; 4Q15: Rp327.1b).
Despite the expected weak production, sales volume in 1Q16 could come in higher yoy from an inventory drawdown. As at end-15, BAL’s inventory level was relatively high (doubled from end-Sep 15’s level). The bulk of the inventory could have been sold down in 1Q16 as Indonesian CPO production was low and refiners were competing for CPO.
Key expectations for 1Q16 include the following:
1. 1Q16 is likely to have seen a lower ASP due to the export duty which was not in effect in 1Q15. The export duty took effect only on 15 Jul 15.
2. 1Q16 CPO sales volume is likely to be higher than production volume. Inventory level at end-15 was at a record-high due to ample supply at that point of time. However, as production dropped, refiners have been competing for CPO.
3. 1Q16 saw larger contribution from the biodiesel segment, given that BAL is likely to have captured the full quarterly impact from the supply of biodiesel to Pertamina. The earnings impact, however, remained insignificant (<1%).
4. Expect higher depreciation as BAL’s new accounting treatment for biological assets took effect on 1 Jan 16.

These were set up over the last two years in key regions to measure sunshine hours, rainfall collection, water evaporation and soil temperature.
These readings are crucial in tracking weather changes and impact and have allowed the agronomist team to take action to mitigate the impact.

We saw at least 4-8 FFB bunches on the trees, which is a good indication of better production over the next three months. However, there is still a lack of FFB on the older trees. Thus, the production recovery did not translate across the broad.
There are now more female flowers on the trees than there were three months ago. The pollination of these flowers will be good for 4Q16’s harvest.

BAL’s agronomist Mr Joshua Mathews commented that rainfall at BAL’s estates in central and west Kalimantan has been good since late-Nov 15. Thus, there has been no further stress on the trees which were producing less female flowers due to the drought in 2H14 and 2H15.

We maintain our net profit forecasts for 2016-18 at Rp1,244b (+27.3% yoy), Rp1,482b (+19.1% yoy) and Rp1,520b (+265% 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.

Maintain BUY and target price of S$1.30, based on 15x 2017F PE.
We like BAL for its young tree age profile, which spells strong production, as well as its hands-on strategy for estate management which has allowed it to consistently deliver a high oil extraction rate (OER).

Surge in CPO prices. BAL has a high leverage to CPO prices. A surge in CPO prices will boost its earnings.
For every 10% increase in CPO prices from our base case, our EPS forecast would increase by 22%

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-06

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.30 Same 1.30