BUMITAMA AGRI LTD.
P8Z.SI
Bumitama Agri (BAL SP) - Worth Accumulating
- Despite our projection of lower CPO prices going into 2018-19, we are expecting BAL’s net profit to grow at a 3-year CAGR of 16% in 2017-19 on strong growth in FFB production and a high OER.
- We think the market has under-appreciated Bumitama Agri (BAL)’s growth potential as share price has been lacklustre despite the good results in 1Q- 2Q17. Balance sheet is expected to improve over the next few years on the back of good production growth and low capex.
- Reiterate BUY. Target price: S$1.03.
WHAT’S NEW
Reiterate BUY and target price of S$1.03.
- Bumitama Agri’s (BAL) share price has been stagnant in the past two months, ranging S$0.70-0.75 despite the company having reported two consecutive quarters of strong results in 1Q-2Q17.
- We believe that BAL is under-appreciated by investors. Thus, we have carried out a series of in-depth analysis on BAL to support our strong BUY recommendation.
Strong FFB production growth.
- FFB production growth has been on an uptrend since 2009 with the exception of 2016 (due to the lagged impact from the severe drought in 2015). For the period of 2009-15, FFB production growth was mainly supported by new mature areas. We noticed that BAL showed production growth in 2013 despite a dip in FFB yield.
- For 2016-19, we expect FFB production to grow at a 3-year CAGR of 15% mainly driven by FFB yield improvement with the percentage increase in new mature areas now lower compared to that in the 2009-15 period. This was mainly due to new planting having been reduced significantly since 2014 due to the strict new planting regulations in Indonesia.
Sensitivity to CPO prices.
- Management indicated during the previous briefing that it did not record any forward sales in 2H17. Thus, current high CPO prices could further enhance BAL’s 2H17 earnings.
- Based on our sensitivity analysis, every 1% increase in CPO prices will increase our 2017 net profit forecast by 2%. Our 2017 net profit forecast is based on a CPO ASP assumption of RM2,600/tonne.
Cash flow is improving, balance sheet position is strengthening.
- BAL’s cash flow is expected to improve over the next few years on the back of good production growth. With the lower capex requirement due to the slowdown in new planting, BAL may tap on its cash flow to reduce bank borrowings and build up its war chest for any good upstream M&As, and for potentially higher dividend payouts in the future.
- We are expecting net debt to equity to reduce to 0.41x in 2019 from 0.65x in 2016.
Other key positive highlights:
Young age profile to support increase in FFB yield.
- About 28% of BAL’s young oil palm trees are in the age range of 4-6 years and are hence in the strongest production growth stage in the FFB yield cycle. FFB yield for young trees tends to grow exponentially until trees reach the age of 12 where yields experience a peak of 25-26 tonnes/ha.
- BAL’s average tree age profile was at 8.7 years as of 1 Jan 17.
Estates strategically located.
- About 98.7% of BAL’s estates are located in the southern part of West Kalimantan and Central Kalimantan. We understand the FFB yield potential in these two regions are higher compared to that in South Sumatra and South Kalimantan.
- Moreover, the southern parts of West Kalimantan and Central Kalimantan have been receiving good rainfall since early-16 and experienced a less severe drought in 2015 compared to East Kalimantan. Thus, BAL is expected to experience better yield recovery compared to peers.
OER among the highest.
- The highest oil extraction rate (OER) BAL recorded was 24% in 2014. BAL reported an OER of 22.7% in 2016, one of the highest in the industry. A higher OER would increase CPO production from FFB processed. Good estate practices for harvesting and loose fruit collection is likely the reason for the high OER achieved.
- Every 0.5% increase in OER, will increase our 2017-19F EPS by 7-11%.
Included in the FTSE ST Consumer Goods & Services Liquid 20 Index.
- The FTSE ST Consumer Goods & Services Liquid 20 Index was launched on 20 Mar 17. The Index comprises the most liquid stocks in either the consumer goods or consumer services industries. The index is reviewed half-yearly. BAL was included in the index during a semi-annual review in Sep 17.
- Changes to the index were applied after the close of business on 15 Sep 17 (Friday) and were effective on 18 Sep 17 (Monday).
2H17 results are expected to remain strong supported by
- Strong FFB production. Management is guiding for FFB production growth of 25% yoy for 2017. Production ratio is expected to be at 48:52 for 1H17:2H17.
- Lower fertiliser costs. We gather that about 73% of fertiliser costs were booked in 1H17, while fertiliser application is likely to be completed in 3Q17. Coupled with the expectation of strong production and low operating costs, we are anticipating another record quarter in 4Q17.
- Resumption of biodiesel delivery. Biodiesel delivery has returned to normal. We understand that biodiesel deliveries were delayed in May-Jun 17 due to some logistical issues in Pertamina. However, operating margin could be lower post the revision of the biodiesel pricing formula to CPO base price + US$100/tonne (revised down from CPO base price + US$125/tonne effective May 17).
EARNINGS REVISION/RISK
- We are maintaining our net profits forecasts of Rp1,443b, Rp1,337b and Rp1,504b for 2017-19 respectively.
VALUATION/RECOMMENDATION
- Reiterate BUY and target price of S$1.03, based on 13x 2018F PE. Our targeted PE is in-line with Singapore sector’s mean PE, but is 2x lower than BAL’s 4-year mean PE of 15x.
- Despite BAL having reported four consecutive quarters of yoy improvement in earnings, BAL share price did not perform accordingly.
- We believe that BAL is deeply undervalued and we advocate investors accumulate at the current low prices. A near-term catalyst would be stronger hoh results for 2H17.
- 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/
2017-09-20
UOB Kay Hian
SGX Stock
Analyst Report
1.030
Same
1.030
