Bumitama Agri - DBS Research 2016-10-24: Undervalued growth stock

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BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Undervalued growth stock

Poised for strong earnings rebound. 

• Anticipated rebound in the group’s FFB yields should drive the group’s 2H16 earnings 50% higher than 1H16. 
• We expect the group’s earnings to continue to expand at a 19% CAGR between FY16F and FY19F – driven by a 9% expansion in CPO production over the same period. 
• In this report, we reiterate our BUY call on the counter on a significant c.39% potential upside to our revised TP of S$0.99. 
• At the current price, we believe there is excessive liquidity discount on the counter.

FY16F/17F/18F earnings revised by -2%/-18%/+2%. 

• Changes in our forecasts mainly reflected -4%/-2%/+5% revisions to our CPO ASP (in Rupiah terms, before export levy). 
• We also adjusted FY17F CPO output 14% lower as we impute lower external FFB purchased based on a lower mill utilisation rate. 
• Accordingly, margins and free cash flow are forecast to improve over the long term – thus yielding a higher DCF valuation.

Drop in planting not impacting volume growth. 

• Aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger (5.5 years) relative to peers. This is forecast to deliver a 12% CAGR in FFB output (including smallholder estates) between FY16F and FY19F.

Valuation

• We employed DCF valuation (FY17F base year) to arrive at BAL’s fair value of S$0.99/share (WACC: 12.8%, Rf: 8.1%, Rm: 15.0%, β: 1.0, TG: 3%) – upgraded from S$0.81 – offering c.39% potential upside from current level.

Key Risks to Our View

• There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. 
• Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-10-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.99 Up 0.810