Bumitama Agri - UOB Kay Hian 2016-07-22: 2Q16 FFB Production Falls Below Expectation

BUMITAMA AGRI LTD P8Z.SI

Bumitama Agri (BAL SP) - 2Q16 FFB Production Falls Below Expectation

Yesterday, BAL reported its FFB production for 2Q16, which was lower than our expectation. This was mainly due to the impact of the drought being more severe than we had expected, especially on its older and newly-matured trees.
We expect FFB production to contract 3.6% yoy (vs +7.9% yoy previously) for 2016. Thus, we have reduced our 2016-18 earnings estimates by 14.8%, 2.7% and 2.8% respectively.

Post earnings adjustment, we lower our target price to S$1.25. Maintain BUY.

Bumitama Agri’s (BAL) fresh fruit bunch (FFB) production dipped 15.7% qoq and 27.4% yoy in 2Q16, which is weaker than our expectation. This was mainly due to the impact from the drought being more severe than we had expected.
For 1H16, total FFB production contracted 17.6% yoy. FFB purchases from external parties also dipped 10.5% yoy for 1H16 as sourcing for third- party FFB has become more difficult with low production being a wide-spread industry problem.

We forecast 2Q16 net profit of Rp150b-170b (1Q16: Rp180.3b, 2Q15: Rp217.7b).
We are expecting lower profit for 2Q16 because the 16.1% qoq and 2.7% yoy increase in CPO prices is not sufficient to offset the significant decline in FFB production and costs were still relatively higher in 2Q16 with the bulk of fertiliser being applied in 1H. As such, we expect 2Q16 cost of production will still remain high. BAL will announce its 2Q16 results on 5 Aug 16.

In line with the decline in FFB production, total CPO production was down 12.4% qoq and 24.9% yoy for 2Q16.
For 1H16, CPO production dipped 15.3% yoy and the drop was partly mitigated by higher third-party purchases at mills.

We are now expecting total FFB production growth to contract 3.6% yoy (vs +7.9% yoy), mainly due to the prolonged impact from dry weather being more severe than we had expected.
Assuming that 1H16 nucleus FFB production accounts for 38% of our full-year estimate, we are now expecting 2016 nucleus FFB production of 1.51m tonnes (-4.4% yoy vs +12.2% yoy previously).
On the other hand, we are forecasting total FFB production growth of 14.4% yoy for 2017 (vs 12.1% yoy previously) with an expected recovery from the low base in 2016 and 12.3% yoy growth in 2018 (vs 16.2% yoy previously).
During our recent palm oil outlook seminar, our guest speaker Mr Ling Ah Hong of Ganling Sdn Bhd did mention that in the region of Kalimantan, central Kalimantan will see a better recovery in 2H16 vs the other regions.
BAL’s producing estates are largely located in Central Kalimantan.

We saw at least 4-8 FFB bunches on the trees during our estate visit in May 16, 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 board.
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.
Additionally, 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.
Also, we expect to see full earnings recognition in 3Q16 from the recent acquisition of PT Langgeng Makumur Sejahtera.

In 2Q16, Indonesia Dumai/Belawan CPO prices improved 16.1% qoq and 2.7% yoy.
CPO prices have been experiencing a short-term correction recently due to market concerns on a strong recovery from production and weaker-than-expected demand from key importing countries, namely China and India. However, we expect production to pick up as we enter the peak production period in Aug 16, but it would still be lower yoy as the El Nino impact is not over yet.
Apart from this, demand is expected to recover on the back of China and India replenishing stock for the upcoming festive season.
All in all, we reckon CPO prices will hover in the range of RM2,300-2,500/tonne in the near term, and trend up to RM2,600-2,700/tonne towards the end of 2016.

We cut our 2016-18 net profit forecasts by 14.8%, 2.7% and 2.8% respectively to factor in lower FFB production growth as mentioned above.
We maintain our CPO price assumptions at RM2,500/tonne, RM2,600/tonne and RM2,500/tonne for 2016-18 respectively.
We are now expecting 2016-18 net profits of Rp1,060b, Rp1,443b and Rp1,477b respectively.

Maintain BUY with a lower target price of S$1.25 (vs S$1.30 previously), post earnings adjustment. Our target price is 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 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/ 2016-07-22

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.25 Down 1.30