Bumitama Agri (BAL SP) - UOB Kay Hian 2017-08-16: Anticipate A Stronger 2H17

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BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri (BAL SP) - Anticipate A Stronger 2H17

• We expect BAL’s 2H17 results to be better than 1H17’s. This will mainly be driven by higher FFB production and resumption of biodiesel deliveries. 
• Management has revised up its FFB production growth guidance to 25% yoy from 15% yoy for 2017 in anticipation of a stronger yield recovery. However, we maintain our FFB production growth forecast of 18.3% yoy for now. 
• We project 2H17 core net profit of Rp892b vs 1H17’s Rp551b. Re-iterate BUY. Target price: S$1.03.

WHAT’S NEW

Key takeaways from 2Q17 results briefing. 

• Key takeaways from Bumitama Agri’s (BAL) 2Q17 results briefing are:
  1. expect production to continue being strong in 2H17, and to peak in 4Q17,
  2. management is revising its FFB production guidance upwards to +25% yoy from +15% yoy for 2017,
  3. about 73% of fertiliser costs were booked in 1H17, with the remaining fertiliser application likely to be complete in 3Q17, and
  4. biodiesel take-up rate has returned to normal since end-Jun 17.

1H17 FFB nucleus production registered a record high and surpassed 1H15’s level.

• For 1H17, fresh fruit bunch (FFB) nucleus production was 891,693 tonnes, higher than 1H15’s FFB production of 696,155 tonnes, which also represents a record-high 1H FFB production for BAL. This was mainly supported by an increase in new mature areas and yield recovery. 
• However, we noticed that FFB yield in 1H17 has yet to recover to 1H15’s level, as production is still affected by the lagged impact from severe drought. 
• We understand that the lagged impact from severe drought is waning and anticipate FFB production to continue to be strong in 2H17 and to register a peak in Oct-Nov 17.

2H17 yoy FFB production growth will be lower than 1H17’s. 

• Meanwhile, the high yoy FFB production growth of 56% in 1H17 will not repeat in 2H17 due to the higher base in 2H16. 4Q17 yoy FFB production growth is likely to be low with 4Q16 FFB production at a historical high.

Upward revision of FFB production growth guidance. 

• Management is now more positive and has revised its FFB production growth guidance upwards to +25% yoy from +15% yoy for 2017. Production ratio is expected to be 48%:52% for 1H17:2H17.
• Nevertheless, we are maintaining our FFB production growth forecast of +18.3% yoy for now. Should we adjust our FFB production growth to +25% yoy, it will increase our 2017 earnings forecast by 2.8%.
• There could be potential further upside to FFB production growth expectation. If we assume 3Q17’s and 4Q17’s FFB production were on a par with 2Q17’s, FFB production growth for 2017 could hit 26% yoy. As such, there could be potential further upside to FFB production growth expectation.

Most of the fertiliser costs were booked in 1H17, suggesting record earnings in 4Q17. 

• We estimate 73% of fertiliser costs was booked in 1H17, while the remaining fertiliser application is likely to be completed in 3Q17. Coupling this with the expectation of strong production and low operating costs, we foresee another record quarter in 4Q17.

Biodiesel delivery has returned to normal. 

• We understand that biodiesel delivery was delayed in May-Jun 17 due to some logistics issues in Pertamina. 
• Nevertheless, biodiesel delivery volume has returned to normal levels since end-Jun 17. Undelivered volume in May-Jun 17 will not be delivered in the subsequent months. 
• Meanwhile, biodiesel subsidy has been reduced to a pricing formula of CPO base price + US$100/tonne from CPO base price + US$125/tonne. This will affect BAL’s operating margin, but it is still profitable for BAL (operating margin of about 2%).

New planting and replanting target maintained at 5,000ha for 2017. 

• As of 1H17, new planting was about 998ha while replanting was about 2,487ha. Management is maintaining its new planting and replanting target of 5,000ha for 2017.

Rainfall has been good thus far. 

• We understand there was a short period of dry spell in the past few weeks in Kalimantan. However, rainfall has recovered recently. 
• Overall, rainfall pattern returned to normal since end-16. Thus, FFB production is expected to be higher in 2018.

Maintain production cost guidance of 5% yoy. 

• Production cost is expected to increase 5% yoy in 2017. The increase will come mainly from more fertiliser application as more areas come into maturity, even though fertiliser prices are expected to be flat yoy. 
• For 1H17, production cost increased about 9% yoy.

EARNINGS REVISION/RISK

• We are maintaining our net profits forecasts of Rp1,443b, Rp1,337b and Rp1,504b for 2017- 19 respectively for now.

VALUATION/RECOMMENDATION

• Maintain BUY and target price of S$1.03, based on 13x 2018F 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 oil extraction rate (OER).

SHARE PRICE CATALYST

• Better-than-expected CPO prices.
• Higher-than-expected FFB production growth.

Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-16

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.030 Same 1.030