Bumitama Agri (BAL SP) - UOB Kay Hian 2017-05-16: 1Q17 Expecting Stronger Quarters

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri (BAL SP) - 1Q17 Expecting Stronger Quarters

BAL’s 1Q17 results were weaker than expected mainly due to front-loaded fertiliser costs (56% of full-year application). However, we maintain our 2017 earnings forecast as we expect lower fertiliser costs in the upcoming quarters and a strong 2H17 on higher production.
Meanwhile, 2Q17 production could be higher qoq as FFB yield recovers and due to Kalimantan’s seasonal patterns.

Excluding forex gains, BAL’s core net profit was Rp267b for 1Q17 (-46.2% qoq, +48.1% yoy). The results came in weaker-than-expected mainly due to higher-than-expected fertiliser costs recorded in 1Q17.
Management has changed its fertiliser application schedule whereby about 56% of the fertiliser was applied in 1Q17 in contrast to 30% in 1Q16.
Although 1Q17 core net profit accounts for 19% of our 2017 full-year estimate, we maintain our earnings forecast as we expect lower fertiliser costs in the upcoming quarters and a stronger 2H17 on the back of a production recovery.

BAL reported a weaker qoq performance mainly due to lower production despite higher CPO prices. The better yoy results was mainly supported by higher CPO prices, while CPO sales volume was flat yoy despite higher CPO production yoy as there was a huge drawdown in inventory in 1Q16 but not in 1Q17.

We are expecting FFB production growth of 18.3% yoy in 2017, slightly higher than management’s expectation of 15% yoy. Growth is expected to come from yield recovery and 14,500ha of new areas coming into maturity in 2017 (13.8% of 2016 mature area), which should provide for about 2-3% FFB production growth for 2017.
Management’s guidance is more conservative as the lagged impact from the severe 2015 El Nino on FFB yield has not yet fully faded (third phase of impact: 20-22 months after the severe dry weather).

Management indicated that 2Q17 production is still higher than 1Q17’s mainly supported by good weather conditions. If we conservatively assume that 2Q17 FFB production would be on par with 1Q17’s, the potential yoy FFB production growth would already hit 50% for the quarter. As such 2Q17 could see easily yoy growth of more than 50%.
Meanwhile, the lagged impact from the severe drought in 2015 has not yet fully faded. Normalisation of production is expected to kick in 2H17 and the peak production is likely to come in 4Q17.

BAL has secured a biodiesel supply contract of 15,344kl for May-Oct 17, which is 15% lower than Nov-Apr 17’s allocation. This could be due to more biodiesel capacity coming on stream.
According to an announcement by the Ministry of Energy and Mineral Resource (ESDM), the biodiesel subsidy will change to incorporate the new pricing formula of the “CPO base price+US100/tonne” from the “CPO base price+US$125/tonne”, most likely effective Jun 17.
Despite the lower biodiesel volume secured and lower biodiesel subsidy, management indicated that the biodiesel segment is still profitable for BAL. Its biodiesel plant utilisation rate is at about 55%.

Management has changed its fertiliser application schedule whereby most of the fertiliser will now be applied in 1H and application is targeted for completion by 3Q. The change is mainly due to:
1. a labour shortage in the peak production period (generally in 4Q); and
2. weather is too wet for fertiliser application at the year-end.
As such, we expect higher fertiliser costs to be booked in 1Q from now onwards and lower costs towards the year-end.
For 2017, management is expecting production costs to increase 5% yoy, which is within our expectation.

Maintain net profit forecasts. We forecast 2017-19 net profits of Rp1,443b, Rp1,477b and Rp1,529b 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 a high OER.

Ooi Mong Huey UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-16

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