Bumitama Agri - RHB Invest 2016-08-08: More Realistic FFB Guidance

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - More Realistic FFB Guidance

Bumitama lowered its 2016 FFB output forecasts to a more realistic -5 to -10%. While it expects a significant recovery in 2H16, it is also sounding more cautious on 2017’s prospects, citing the secondary effect of El Nino.
We lower our TP to SGD0.75 (from SGD0.81), implying a lowered EV/ha of USD8,000, taking into account the lowered pricing of landbank in the current market environment.

No change to our NEUTRAL call.
Key catalysts to look out for include a turnaround in CPO price, a pick-up in demand and extreme climate conditions.

Bumitama Agri (Bumitama) has lowered its FFB production projection to -5 to -10% YoY this year (from +8% originally).
This stark reduction is slightly offset by the 16,000 ha of new areas coming into maturity this year. 1H16 FFB output fell 17.3% YoY in 1H16.

Our FY16 FFB growth projection is -13.1%, followed by an increase of 17-20% in FY17-18, 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.
Key risks include the reversal of CPO price trends as well as weaker-than-expected demand.

Maintain NEUTRAL, no change to our earnings forecasts.
We lower our TP to SGD0.75 (from SGD0.81), based on a lower target P/E of 13x (from 14x) on 2017F earnings and an EV/ha of USD8,000/ha (from USD9,000) – which is at a slight discount to its peers, which trade at USD10,000-20,000/ha.
This is due to Bumitama’s relatively younger estates and to reflect the lowered pricing of landbank in the current market environment. For exposure to a SGX- listed plantation stock, we prefer Golden Agri (GGR SP, BUY, TP: SGD0.42).

Bumitama’s 1H16 results were in line with our expectations, reaching 40% of our FY16 forecast – but below consensus, coming in at only 27%. FFB production fell 17.3% YoY in 1H16, in line with our forecast of -13%, but much lower than management’s original guidance of +8% for FY16.
In 1H16, Bumitama’s planted area increased by 2,554ha. Only 396ha was for actual new planting, while the rest came from a landbank acquisition completed in 1Q16. Management does not expect to be able to plant up much more landbank for the rest of the year, given the intensified environmental regulations in place. Management highlighted that it has already met its original 5,000ha new planting target for FY16, as this includes acquisitions. With the two acquisitions it has made so far in 2016, total new planted area in 1H16 is 7,190ha. Bumitama now has a total planted landbank of 171,763ha, with an estimated 15,000ha left to plant.
Bumitama’s cash cost in 2Q16 was IDR4,830 per kg, or 5% lower YoY, bringing 1H16 cash cost to IDR4,398/kg (2.3% lower YoY). Going forward, management expects production costs to be about 5% higher QoQ, after taking into account the 11% hike in minimum wages as well as flattish fertiliser costs. This is in line with our forecasted increase of 5-7% for FY16.

Bumitama has sold forward to Wilmar (WIL SP, NEUTRAL TP: SGD3.28) 195,000 tonnes of CPO (about 25% of full-year output) for delivery in 2H16 at prices ranging between IDR7,182 per kg and IDR7,364 per kg (MYR2,200-2,300 a tonne).

In 1H16, Bumitama delivered about 14,786 tonnes of biodiesel to Pertamina, which is about 62% of its total contracted amount of 23,800 tonnes for the period of May to Oct 2016. Bumitama’s biodiesel capacity expansion to 60,000 tonnes pa is in progress and on track to be completed within the next six months. In 1H16, it managed to achieve gross profit margins of about 11%.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-08

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.75 Down 0.810