Bumitama Agri - RHB Invest 2018-02-27: Closing Down The Biodiesel Business

Bumitama Agri - RHB Invest 2018-02-27: Closing Down The Biodiesel Business BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri - Closing Down The Biodiesel Business

  • Bumitama’s FY17 core net profit was largely in line with forecasts despite FFB output growth coming in slightly below expectations at 18% (vs our 22% projection). 
  • Management expects the weakness in 4Q17’s output to recover in FY18, projecting 15-20% FFB growth. Bumitama has also bitten the bullet and closed its loss-making biodiesel business, incurring some IDR24.9bn in impairment costs. 
  • We trim our earnings and reduce our Target Price to SGD0.85 (from SGD0.95, 18% upside). Maintain BUY, as earnings growth remains decent while valuations are inexpensive at 8-10x P/E.

In line. 

  • Bumitama Agri’s (Bumitama) FY17 core net profit came in at 101-105% of our and consensus FY17 forecasts respectively.
  • FY17 FFB output grew by 18% y-o-y. It recorded FFB output growth of 18% y-o-y on the back of 7,464ha of land, which came into maturity in FY17. This growth is, however, below management’s growth guidance of 25%.

Briefing highlights: 

  1. For FY18, Bumitama is projecting FFB growth of 15-20% y-o-y, coming from 4,732ha of land coming into maturity. This is in line with our FY18-19 assumptions of 15-17% y-o-y respectively;
  2. Bumitama’s FY17 unit cost was IDR4,239/kg (+15.7%YoY), higher than management’s original +5-10% y-o-y guidance. This was due to lower-than- Agriculture | Plantation Buy (Maintained) expected FFB growth of 18% (vs the 25% budget), and higher upkeep and maintenance costs on water and grounds management in 4Q17. For FY18, management expects costs to increase 5-10% y-o-y on the back of higher fertiliser application volumes (+12.6% y-o-y) and fertiliser prices (+8- 9%). We have raised our cost assumptions accordingly; 
  3. In FY17, Bumitama planted 4,400ha and replanted 3,809ha of land. For FY18, it is targeting to plant up to 3,000ha of new landbank at a cost to maturity of USD8,000/ha; 0.80 0.75 0.70 0.65 106 99 92 85 78 71
  4. Given the negative margins caused by the new pricing structure, Bumitama has discontinued its biodiesel plant at end-2017. There was no penalty incurred for the non-delivery of its Nov 2017-April 2018 biodiesel contract. With this, it incurred an impairment cost of IDR24.87bn for the plant. Management is currently negotiating to sell the land and equipment to recoup the remaining investment cost of IDR130bn. We have revised our forecasts to exclude biodiesel contributions.

Still a BUY. 

  • We trim earnings estimates by 4-8% for FY18-19 and adjust for our latest in-house exchange rate assumptions. Our Target Price is reduced to SGD0.85 (from SGD0.95), which is based on an unchanged target P/E of 12x – in line with its peers and the historical average. This implies an EV/ha of USD10,000.00, ie at the low end of its peer range. 
  • Its peers trade between USD10,000.00-15,000.00/ha. Valuations remain undemanding at current price levels, with Bumitama’s FY18F P/E averaging around 8-10x vs its historical averages of 11-12x. Its current EV/ha of USD7,700.00/ha is even below the replacement values of USD8,000.00-10,000.00/ha. 
  • Key risks include the weather, as well as the global supply and demand dynamics of edible oils.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.85 Down 0.950