Bumitama Agri - RHB Invest 2016-07-27: Weak FFB Output To Weigh Down 2Q16 Earnings

BUMITAMA AGRI LTD P8Z.SI

Bumitama Agri - Weak FFB Output To Weigh Down 2Q16 Earnings

Bumitama Agri’s 2Q16 FFB output was dismal (-26.3% YoY), and we expect it to report disappointing earnings during its results release next Friday.
We have cut our FFB output forecasts to reflect a 13% decline for FY16 (from +4.5%) and our earnings projections by 13.2-4.5% for FY16-18.
With this, we also downgrade our recommendation to Neutral, and lower our TP to SGD0.81 (from SGD0.95, 10% upside).

Bumitama Agri recorded dismal FFB output in 2Q16, as FFB production fell by 26.3% YoY. This brought 1H16 FFB output decline to -17.3% YoY, which is significantly below our originally projected 4.5% growth for 2016, and management’s internal projection of 8% growth.
The decline in output was due to the delayed effects of El Nino, which hit the Kalimantan region badly during the quarter.

Although management has yet to revise its internal output guidance and will only do so during the results briefing (next Friday), we have lowered our FFB output and earnings forecasts to reflect the larger-than-expected impact of El Nino.
We now project FY16 FFB output to fall 13.1%, followed by an increase of 17- 20% in FY17-18 (from +14-19%), as we assume a strong recovery in 2017 – barring any unforeseen weather conditions. We highlight that the probability of La Nina continues to decline, and is now at 58% (from 65% last month) to occur in 4Q16/1Q17.

We reduce our earnings by 13.2-14.5% for FY16F-18F, after adjusting our FFB output forecasts, as well as raising our cost assumptions, given the lower yield conditions for FY16. We highlight that our earnings forecasts are now one of the lowest on the street, being 25-35% below consensus. Our CPO price assumptions are unchanged currently, at IDR7,342/kg for FY16.

With this earnings downgrade and the impending 2Q16 results – which are bound to disappoint – we downgrade our recommendation on Bumitama Agri to NEUTRAL (from Buy), with a lower TP of SGD0.81 (from SGD0.95).
Our new TP is based on an unchanged target P/E of 14x on 2017 earnings and an EV/ha of close to USD10,000/ha, in line with its peers which are trading at USD10,000-20,000/ha. For exposure to a SGX-listed plantation stock, we prefer Golden Agri (GGR SP, BUY, TP: SGD0.42).
Key risks to our forecasts include extreme weather conditions and significant changes in the global demand and supply scenario.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-27

RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.81 Down 0.95