Bumitama Agri - RHB Invest 2017-09-27: Trading Below Replacement Value

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Trading Below Replacement Value

Investors were interested to find out more about Bumitama’s FFB growth outlook as well as improving age profile during our 2-day NDR in Singapore recently.
With P/E valuations trading below its historical mean and EV/ha valuations trading below replacement value, investors found the company to be an interesting proxy to the recovery in CPO prices when the cycle turns.

We maintain our BUY recommendation, with an unchanged TP of SGD0.85 (15% upside), which implies an EV/ha of USD9,000, which is at the lower end of its peers’ USD9,000-13,000/ha.

We brought Bumitama Agri (Bumitama) on a NDR in Singapore, where we met with 13 institutional investors over a 2-day period. Most investors were looking for a proxy to the plantation sector, which would do well in the next CPO price rally.
Investors were impressed with the company’s strong FFB output growth of 55.9% YoY in 1H17, and projected 25% growth for FY17, and wanted to find out if the strong growth was sustainable.
While management did not give specific guidance as to FY18F growth, it said the company should still see double-digit growth in the next few years, on 3,800ha of new land coming into maturity in 2018 and 6,700ha in 2019 (from 14,500ha in 2017). As for prime areas, management expects this to rise by 15,000ha over the next four years.
Our forecasts reflect FFB growth of 27% for FY17, and 15-16% for FY18-19.

This is in view of it trading at an EV/ha of USD7,700/ha, compared to new planting cost of USD8,000-10,000/ha. However, investors were concerned about liquidity of the stock, given the average daily trading volume of only USD0.3m. However, management highlighted that ever since it embarked on its share buyback programme, it has been able to buy shares quite easily from the market, with volumes going up to as high as USD0.5m shares/day.
Currently, the company has about 13m shares held in treasury from its share buyback programme. Its rationale for the buyback was that it sees value in its own shares, particularly given the fact that it is trading below the replacement value.

Bumitama currently has a dividend policy of a minimum 20% net payout, although in FY16, it paid out an estimated 28% based on core earnings.
Given the reduced cash requirements for new planting from hereon (assuming no significant acquisitions), management has indicated that it is looking to potentially increase its dividend policy to as high as 50%, although no timeline was given.
We estimate that based on a 50% payout, dividend yield would increase to 3-4% (from 2-3% currently).

Our Target Price is maintained at SGD0.85, which implies an EV/ha of USD9,000. This is at the lower-end of its peers’ USD9,000-13,000/ha range.
We think this is justified, given Bumitama’s relatively younger estates. We believe valuations remain undemanding at current levels, with P/Es averaging c.10-11x for FY17F and FY18F, vs its historical average of 11-12x, and our target of 11x for 2018F.
We believe the company’s strong FFB growth trajectory supported by its prime plantation age would help offset the expected decline in CPO price trend.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-09-27

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.850 Same 0.850