Bumitama Agri - UOB Kay Hian 2016-08-08: 2Q16 Below Expectation On Higher-than-expected Depreciation

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - 2Q16 Below Expectation On Higher-than-expected Depreciation

2Q16 results came in below expectation due to higher-than-expected depreciation, while operational performance was in line. We are maintaining our forecast of FFB production falling 3.6% yoy in 2016 vs management’s guidance of -5% to -10% yoy.
With the disappointment in guidance for 1H16, the revised guidance is too cautious.
We cut 2016 net profit forecast by 13.2% to factor in higher depreciation, but maintain our 2017-18 earnings estimates. Maintain BUY on BAL. Target price: S$1.25.

Bumitama Agri (BAL) reported core net profit of Rp111b (- 38.4% qoq, -37.4% yoy) in 2Q16 and Rp291b (-19.1% yoy) in 1H16. Results were below our expectation mainly due higher-than-expected depreciation (+>100.0% qoq, +33.9% yoy). Operational performance was within expectation.
The lower qoq and yoy profit was mainly due to lower CPO sales volume (-27.9% qoq, - 23.6% yoy), but partly offset by higher CPO prices (+23.8% qoq, +3.4% yoy). However, we note EBITDA margin improved marginally yoy from 23.3% in 2Q15 to 23.7% in 2Q16 mainly attributable to an efficiency programme to reduce overheads and raise labour efficiency.
The high depreciation expense was mainly due to the adoption of amended FRS 41 in Jan 16 and more new plantation areas coming into maturity. Management expects depreciation expenses in 3Q-4Q16 to be at 2Q16 level of Rp149.8b.

Management indicated that FFB production remained weak in July, affected by the one-week Eid Fitr holidays. We understand the rainfall has normalised in 1H16. However, the lagged impact from the El Nino will still suppress yields. For 1H16, FFB yield declined 32.5% yoy to 5.6 tonne/ha. All in all, management is expecting FFB production to pick up from Sep 16 to Dec 16, and 60% of its full-year production will be harvested in 2H16.

Management revised down its FFB production growth guidance of 8% yoy to -5% yoy or at worst -10% yoy. We are maintaining our FFB production forecast of a 3.6% yoy fall in 2016 as we believe FFB production is likely to be supported by newly mature areas as well as its young oil palm trees approaching the prime age. For 2016, management is expecting 16,000ha to come to maturity.

BAL planted 196ha of new areas in 2Q16, bringing total new planted area to 396ha in 1H16. In view of more stringent new planting procedures (NPP), BAL will slow down its new planting activity to make sure that it complies with all the new planting requirements.

BAL is eyeing brownfield acquisition for growth after scaling down its new planting. However, we understand that an acquisition would not be easy as the acquired areas must comply with stringent environmental and regulatory requirements, while come in at reasonable price.
Currently, market prices for a brownfield are US$13,000-14,000/ha. BAL’s net gearing was 0.92x as at end-Jun 16.

BAL secured biodiesel supply contracts from Pertamina to supply 20,078 kilolitres for Nov 15-Apr 16 and 23,188 kilolitres for May-Oct 16.
Biodiesel sales volumes are meeting daily delivery requirement with gross margins of about 11% (vs 5% in 2015) as production volume picks up.

We cut our net profit forecast for 2016 by 13.2% to factor in higher depreciation but maintain our net profit forecasts for 2017-18.
We are now expecting net profits of Rp920.5b, Rp1,442.8b and Rp1,477.2b for 2016-18 respectively.

Maintain BUY and target price of S$1.25, based on 15x 2017F PE.
We like BAL for its young tree age profile, which spells strong production, as well as its hands-on estate management which has allowed BAL to consistently deliver high oil extraction rate (OER).

BAL is highly leveraged 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 22%.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-08

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250