Bumitama Agri (BAL SP) - UOB Kay Hian 2018-02-21: 4Q17 Results Preview ~ Expect Lower Y-o-y Earnings

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BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri (BAL SP) - 4Q17 Results Preview ~ Expect Lower Y-o-y Earnings

• We cut 2017-19 net profit estimates by 9%, 6% and 9% respectively to factor in lower FFB production growth and a higher effective tax rate for 2017. We forecast 4Q17 net profit of Rp330b-370b (stronger q-o-q but weaker y-o-y). 
• Maintain BUY but we trim target price to S$0.96. 
• We like Bumitama Agri (BAL) for its young tree-age profile which spells strong production which can offset the low CPO ASP, and consistently high OER.

WHAT’S NEW

Cut 2017-19 earnings estimates. 

• We cut our 2017-19 net profit estimates for Bumitama Agri (BAL) by 9%, 6% and 9% respectively to factor in lower FFB production growth and a higher effective tax rate for 2017.
• Our revised 2017 net profit estimate of Rp1,190b is marginally higher than consensus’ Rp1,174b. The lower earnings estimate factors in: 
  1. Lower FFB production growth. We gather that FFB production in Central Kalimantan fell by high-single-digit q-o-q in 4Q17 due to: 
     1. the lagged impact from the 20-24 months of drought ending in end-15, and 
     2. high rainfall which caused difficulties in harvesting and transporting FFB crop.
     BAL has about 50% of its planted areas in Central Kalimantan. We reckon BAL could report lower-than-expected FFB production in 4Q17. Thus, we cut our FFB production growth estimate to 20% y-o-y from 25% y-o-y for 2017. We are expecting FFB production of 0.66m-0.73m tonnes in 4Q17.
  2. Higher effective tax rate. As of 9M17, BAL’s effective tax rate was 25.6%. We reckon the effective tax rate there would not decline significantly in 4Q17. Thus, we raise our effective tax rate assumption to 24% for 2017 (from 21.6%).

4Q17 earnings likely to be better q-o-q but weaker y-o-y. 

• We forecast 4Q17 net profit of Rp330b-370b (3Q17: Rp273b, 4Q16: Rp497b). We expect stronger q-o-q earnings in 4Q17 on a small improvement in FFB production and lower operating costs as most of the fertiliser costs were booked in 9M17. 
• 4Q17 net profit is expected to be weaker y-o-y due to: 
  1. high base in 4Q16, which reported record high earnings;
  2. lower CPO ASP; and
  3. weaker FFB production. 
• BAL targets to announce 4Q17 results on 27 Feb 18 before the market opens.

STOCK IMPACT

4Q17 FFB production expected to improve slightly q-o-q but fall y-o-y. 

• In 9M17, FFB production was 1.98m tonnes (+42.4% y-o-y). We are expecting FFB production of 0.66m0.73m tonnes in 4Q17, slight improvement or flat q-o-q, but lower y-o-y. 
• To recap, the record-high production in 4Q16 was mainly due to an abnormal production pattern caused by the lagged impact of the severe drought in 2015 which pushed production forward to 4Q.

2017 FFB production could come in below management guidance. 

• Production ratio is expected at 48%:52% for 1H17:2H17. We gather that Central Kalimantan was affected by high rainfall in 4Q17, leading to difficulty in harvesting and transporting FFB crop. Thus, BAL’s FFB production growth in 2017 could come in below management guidance of 25%. 
• We cut our FFB production growth estimate for 2017 to 20% y-o-y (from 25%).

Weaker FFB production growth in 2018-19. 

• We forecast FFB production growth of 8.7% y-o-y and 8.6% y-o-y for 2018-19 respectively on lower FFB yield assumptions of 16.4 tonnes/ha (previously 18.1 tonnes/ha) for 2018 and 17.7 tonnes/ha (previously 19.7 tonnes/ha) for 2019.

Most of fertiliser costs were booked in 9M17, suggesting higher earnings in 4Q17.

• We gather that about 92% of fertiliser costs were booked in 9M17 (9M16: 67%), while only a small percentage of fertiliser application is likely to be completed in 4Q17. Thus, BAL is likely to report better q-o-q earnings in 4Q17 on the back of higher FFB production and lower operating costs.

Biodiesel delivery has retuned to normal, but negative margins. 

• We understand that the biodiesel delivery has returned to normal. However, margins were negative as the biodiesel subsidy has been reduced to a pricing formula of CPO base price + US$100/tonne (previously CPO base price + US$125/tonne). 
• Moreover, utilisation rate is declining due to lower awarded volume.

CPO prices flat q-o-q but weaker y-o-y in 4Q17. 

• Dumai/Belawan CPO ASP was flat q-o-q but weaker y-o-y in 4Q17. Dumai/Belawan CPO prices have weakened from a high of US$722/tonne on 15 Sep 17 to the low of US$616/tonne on 22 Dec 17 mainly due to the faster-than-expected inventory build-up on weaker demand.

EARNINGS REVISION/RISK

Cut 2017-19 earnings estimates. 

• We cut our 2017-19 net profit estimates by 9%, 6% and 9% respectively to factor in lower FFB production growth estimates for 2017-19 and a higher effective tax rate for 2017.
• We forecast net profits of Rp1,190b, Rp1,253b and Rp1,368 for 2017-19 respectively.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower target price of S$0.96 (from S$1.03) after revising down our 2018 net profit s estimate. Our target price is based on 13x 2018F PE. 
• We like Bumitama Agri (BAL) for its young tree-age profile which spells strong production which can offset the low CPO ASP, as well as its hands-on estate management which has allowed BAL to consistently deliver high OER.

SHARE PRICE CATALYST

• Higher-than-expected FFB production.

Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-21

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.96 Down 1.030