Bumitama Agri - RHB Invest 2017-12-13: Adjusting For Higher CPO Price Assumptions

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Adjusting For Higher CPO Price Assumptions

We believe that downside risks for CPO prices will not be significant from hereon, since prices have already fallen 27% since February, as the market has priced in the output recovery post El Niño. However, we do not expect prices to bounce back strongly either, given the weak demand dynamics and the still-high inventory levels.
We lift our CPO price estimates to MYR2,550/tonne for 2018 (-9% YoY) and to MYR2,700 for 2019 (+6% YoY).
We still like Bumitama for its double-digit FFB growth and inexpensive valuations. Maintain BUY, with a SGD0.95 TP (25% upside).

While we still expect CPO output to grow, particularly in parts of Malaysia where recovery has been slower, we believe much of this has been reflected in CPO prices.
CPO prices fell from a high of MYR3,348/tonne in Feb 2017 to a low of MYR2,400/tonne in Dec 2017, and is currently at close to these low levels.

Still, we lift our average price per tonne assumptions to MYR2,550 (from MYR2,400) and MYR2,700 (from MYR2,500) for 2018-2019 respectively. We expect CPO output growth in Malaysia and Indonesia to decline in 2018, from the estimated 12% and 21% YoY jump respectively in 2017.
With the seemingly delayed CPO production peak season in Malaysia in 2017, it is likely that part of the peak season will flow into 1Q18, which could result in Malaysia recording CPO output growth of 5-7% in 2018.
Indonesia, however, seems to have hit its peak already in Oct/Nov, which means the production cycle has normalised somewhat, resulting in CPO output growth of 3-5% for 2018.

Bumitama is expected to post a strong FFB growth of 23% in FY17, on the back of a recovery from El Niño.
For FY18-19, we expect FFB growth to continue in the double-digits, at 16-18% YoY. This is on the back of 3,800ha of new land coming into maturity in 2018 and 6,700ha in 2019 (from 14,500ha in 2017), as well as an increase of 15,000 ha in prime areas over the next four years.

We expect overall margins to improve going forward, as more and more of the fruits processed are sourced from its nucleus estates.
Management estimates that GPM on FFB sourced from nucleus estates are about 50%, while GPM of plasma estates are at around 20%, followed by external fruits at 15%. Currently, 50% of the fruits processed are from its nucleus plantations, while 23% is from plasma, and 27% from external sources.

We raise earnings estimates by 7-14% for FY18-19 post our CPO price revision.
Our Target Price of SGD0.95 is maintained, however, as we apply a lower target P/E of 11x (from 12x) in line with the shrinkage of sector peer valuations. This implies an EV/ha of USD10,000, at the low end of its peer range – its peers trade between USD10,000-15,000/ha.
Valuations remain undemanding at current price levels, with its FY18F P/E averaging around 8x-10x, vs its historical averages of 11x-12x, while its current EV/ha of USD7,700/ha is even below the replacement values of USD8,000-10,000/ha.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-13

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.950 Same 0.950