Bumitama Agri - DBS Research 2017-02-24: Consistent earnings growth delivery

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Consistent earnings growth delivery

Bumitama Agri (BAL)'s 4Q16 earnings slightly below on steeper translation FX losses.
FY17F FFB output guided to expand 15% y-o-y.
FY17F/18F earnings tweaked -3%/-3%.

We expect the group’s earnings to expand 7% CAGR between FY16 and FY19F, driven by an 8% CAGR expansion in crude palm oil (CPO) production over the same period.
We reiterate our BUY call with a significant c.25% potential upside to our TP (unchanged). We believe there is currently excessive liquidity discount on the counter.

Excluding Rp54bn deferred tax credit and changes in fair value of biological assets (net of deferred tax), Bumitama Agri (BAL) booked 4Q16 earnings of Rp387.4bn (+95% y-o-y; +154% q-o-q) – slightly below Rp411.7 bn expected, mainly on the back of steeper translation FX losses for the quarter.
Imputing FY17F production guidance, expanded biodiesel capacity and FY16 results, we adjusted FY17F/18F earnings slightly by -3%/-3%.
The counter’s DCF valuation remains unchanged at S$0.99, offering 25% potential upside from the current level.

Aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers. This is forecast to deliver an 11% CAGR in FFB (Fresh Fruit Bunch) output (including smallholder estates) between FY16F and FY19F.

We employed DCF valuation (FY17F base year) to arrive at BAL’s fair value of S$0.99/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, : 0.8, TG: 3%) offering c.22% potential upside from the current level.

There would be downside risk to our CPO (Crude Palm Oil) 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 the valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-02-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.990 Same 0.990