Bumitama Agri (BAL SP) - DBS Research 2018-02-27: Share Price Still Trails Strong 4Q Performance

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri (BAL SP) - Share Price Still Trails Strong 4Q Performance

Bumitama Agri's 4Q17 NPAT was in line with our estimate.
Higher CPO and PK ASP q-o-q buffered performance.
Keeping our forecast for now as share price has not fully reacted to the strong finish in 2017.
Maintain BUY with unchanged Target Price of S$0.94.

Bumitama Agri (BAL) booked net profit after tax of Rp364bn (-21.2% y-o-y, +36.6% q-o-q), in line with our and consensus estimates. BAL's q-o-q improvement was attributed to the higher Crude Palm Oil (CPO) and Palm Kernel (PK) average selling price (ASP) trend.
Amid the stable cost performance, BAL’s 4Q17 profitability was the strongest in the year, despite the absence of meaningful q-o-q CPO and PK production expansion in the period.

Revenue reached Rp2tr (-9% y-o-y, +0.7% q-o-q), above our estimate, thanks to the stronger-than-expected PK price and steady CPO price trend in the period. BAL’s CPO and PK ASP reached Rp8,140 per kg (+5% y-o-y, +5% q-o-q) and Rp7,461/kg (+1% y-o-y, +24% q-o-q) respectively.
On the other hand, the longer-than-expected El Nino in 2016 caused the slower-than-expected quarterly output expansion at Bumitama's estates during the period. Fruit production stood at 910,000 MT (-16% y-o-y, -2% q-o-q), followed by CPO and PK production of 205,700 MT (-17% y-o-y, -1% q-o-q and 44,900 MT (-5% y-o-y, +9% q-o-q), still in line with our forecast, as we had maintained our forecast despite the stronger-than-expected operational performance in 9M17.
Usually, the El Nino will impact the palm tree production for the next 20-24 months.

We keep our forecast for now as our DCF-based target price still implies an appealing share price potential upside of 31%. Moreover, BAL is still trading at 11.0x FY18F PE, which is at around a 30% discount relative to its regional peers. We understand part of the discount may be attributed to the share trading liquidity matters.
However, looking at the performance, we believe BAL deserves to at least trade at par with its regional peers' PE multiple of above 14-15x.
We believe Bumitama is poised to deliver sound organic growth on maturing palm oil trees and yield expansion from existing producing trees. Moreover, besides the potentially better operational leverage from production expansion this year, we see some scope for further margin improvement from a higher proportion of own estate fruits vs. third parties which could provide some buffer to total operational cost.

Our target price remains at S$0.94 given no changes in our earnings forecasts.
We employ Discounted Cash Flow (DCF) methodology with WACC and terminal growth rate assumptions of 10.4% and 3.0% respectively. Our Target Price implies FY18F PE of 14.5x.

William Simadiputra DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-02-27

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.940 Same 0.940