Bumitama Agri (BAL SP) - UOB Kay Hian 2018-02-28: 4Q17 Results Within Expectations

BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri (BAL SP) - 4Q17: Results Within Expectations

Bumitama Agri (BAL)’s 4Q17 results were within expectations. The stronger q-o-q results were mainly due to lower operating costs as most of the fertiliser costs had been booked in 9M17, while the weaker y-o-y performance was mainly due to lower sales volume. The higher net profit in 2017 was mainly due to higher FFB production.
2018 net profit is likely to grow 7%, driven by FFB production growth of 7% y-o-y which would mitigate CPO ASP weakness in 2018.
Maintain BUY. Target price: S$0.96.

Bumitama Agri (BAL) reported a net profit of Rp364b (+36.6% q-o-q, -32.3% y-o-y) in 4Q17.
Excluding gains from fair value changes in biological assets and forex losses, core net profit was at Rp336b for 4Q17 (+23.4% q-o-q, -32.3% yoy) and Rp1,172b (+21.0% y-o-y) for 2017. The results were within expectations.

Bumitama Agri reported stronger q-o-q earnings in 4Q17, largely attributed to lower operating costs as most of its fertiliser costs were booked in 9M17.
On the flipside, 4Q17 net profit was weaker y-o-y due to:
1. a high base in 4Q16, for which Bumitama Agri reported record-high earnings, and
2. weaker FFB production.

The higher net profit in 2017 was mainly due to higher sales volumes on the back of a FFB production recovery and contribution from new mature areas as well as a higher CPO ASP.

Bumitama Agri registered FFB production growth of 19% y-o-y in 2017. This is lower than management’s guidance of 25% y-o-y during 3Q17’s briefing.
The negative variance was mainly due to FFB production declining substantially in Nov-Dec 17 due to the lagged impact from the severe drought in 2015-16. FFB production declined 9.7% q-o-q and 22.0% y-o-y in 4Q17.

We forecast FFB production growth of 7% y-o-y for 2018. This is lower than management’s guidance of 15- 20% y-o-y for 2018.
We are more conservative as the lagged impact from severe drought in 2015 could still affect FFB yield. FFB production was still weak in Jan 18 and started to see a recovery in Feb 18. We will observe the FFB production pattern in 1Q18 and potentially increase our FFB production growth assumption for the year in the next quarter if FFB production improves.
Every 5ppt increase in FFB production growth will increase our 2018 net profit forecast by 3.2%.

Bumitama Agri stopped biodiesel deliveries since Dec 17. It faced no penalty on early termination of its biodiesel contract given that management provided a reasonable notice period. The key reason for the closure of its biodiesel plant was negative margins as a result of the biodiesel subsidy having been reduced to a pricing formula of CPO base price + US$100/tonne (previously CPO base price + US$125/tonne). Moreover, utilisation rate was declining due to lower awarded volumes.
Management is in discussions with a few potential buyers regarding the sale of its biodiesel plant. Management recorded a provisions loss of Rp25b for the biodiesel plant in 2017.

Production costs are expected to increase 5-10% y-o-y in 2018. The increase will mainly come from more fertiliser application as more areas come into maturity and minimum wages increase.
Management expects CPO ASP of RM2,650/tonne for 2018, which is higher than our CPO price assumption of RM2,400/tonne. We maintain our CPO ASP assumption for now as we maintain our view that CPO prices are likely to experience significant weakness in 2H18 when production picks up strongly. Every RM50/tonne increase in CPO ASP will increase our 2018 net profit forecast by 5%.

We maintain our net profit forecasts for 2018 and 2019 at Rp1,251b and Rp1,367b respectively.
We introduce our 2020 net profit forecast of Rp1,477b (+8.1% y-o-y) on the back of FFB production growth of 11% and a CPO price assumption of RM2,500/tonne (2019F: RM2,500/tonne).

Maintain BUY and target price of S$0.96, based on 13x 2018F PE.
We like Bumitama Agri for its young tree-age profile which spells strong production which can offset a low CPO ASP, as well as its hands-on estate management which has allowed Bumitama Agri to consistently deliver a high OER.

Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-28

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