Bumitama Agri - DBS Research 2016-06-14: Close to fair value

BUMITAMA AGRI LTD P8Z.SI

Bumitama Agri - Close to fair value

FY16F/17F EPS reduced by 3% and 10% on changes in our key assumptions
BAL is maintaining internal FFB volume growth of 8% this year, including new maturities, acquisitions
TP lowered to S$0.91; rating cut to HOLD on limited 10% upside potential

Despite best efforts to maintain higher FFB yields compared to its peers with the same age profile, El Nino will have an impact on Bumitama Agri (BAL) this year. Reduced palm oil price expectations next year lead us to trim the counter’s estimated fair value. In this report, we downgraded our rating on the counter to HOLD on limited upside potential.

The group had recently announced the acquisition of Langgeng Makmur Sejahtera (LMS), whose main asset consists of 4,810ha of oil palm estates – of which 4,208 ha is planted. These were the same estates that were foregone last year due to revocation of Izin Lokasi permit in favour of another entity, which has now resold the estates back to BAL for total consideration of Rp250m.
We accordingly adjusted our model to re-include hectarage from LMS.

The group is maintaining its internal FFB (own and smallholders) output growth guidance of 8% this year (slowest growth since listing), and is expected to book 12% volume growth next year.
As we impute this and changes to our CPO price forecast, we trimmed FY16F/17F earnings by 3% and 10% respectively, arriving at revised TP of S$0.91

We employed DCF valuation (FY17F base year) to arrive at BAL’s fair value of S$0.91/share (WACC: 12.6%, Rf: 8.1%, Rm: 15.0%,β: 1.0, TG: 3%).
We reduced Indonesia’s risk free rate to 8.1% from 8.8% previously.

There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year.
BAL’s output could also fall below our expectations if there is a significant hit to its FFB yield in the aftermath of CY15 El Nino (vice versa).
Changes in fund flows in or out of emerging markets/ commodities would also affect valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/

CIMB Securities SGX Stock Analyst Report HOLD Downgrade BUY 0.91 Down 0.96