Bumitama Agri - UOB Kay Hian 2018-05-09: 1Q18 Within Expectations

Bumitama Agri - UOB Kay Hian 2018-05-09: 1q18 Within Expectations BUMITAMA AGRI LTD. SGX: P8Z

Bumitama Agri - 1q18 Within Expectations

  • Bumitama Agri’s 1Q18 results were within expectations as we expect stronger FFB production in 2H18 and lower costs in 4Q18.
  • Bumitama Agri reported a weaker q-o-q performance mainly due to lower CPO sales volume on an inventory build-up and lower CPO prices. The weaker y-o-y results were mainly due to lower CPO prices despite better CPO sales volume.
  • Maintain BUY but reduce target price to S$0.80 as we ascribe a lower 2018F PE of 11x on a weaker CPO price outlook.



RESULTS

  • Bumitama Agri (BAL) reported a net profit of Rp231b (-36.3% q-o-q, -16.8% y-o-y) for 1Q18. Excluding forex gains, core net profit came in at Rp211b for 1Q18 (-37.4% q-o-q, -21.1% y-o-y). 1Q18 core net profit accounted for 18% of our full-year estimate and the results were within expectations as we expect earnings to pick up in the coming quarters on stronger FFB production in 2H18 and lower costs in 4Q18 as most of the fertiliser costs will be booked in 1Q-3Q18. Management has applied 32% of fertiliser targeted for 2018 in 1Q18 vs 56% of fertiliser applied in 1Q17. Moreover, 2Q18 CPO sales volume is likely to increase as the built-up inventory in 1Q18 will be delivered in 2Q18.
  • 1Q18 results weaker q-o-q and y-o-y. Bumitama Agri reported a weaker q-o-q performance mainly due to lower CPO sales volume on an inventory build-up and lower CPO prices. The weaker y-o-y results were mainly due to lower CPO prices despite better CPO sales volume.


STOCK IMPACT

  • Adjusted internal FFB production growth forecast upwards… FFB production grew 20% y-o-y in 1Q18. We have adjusted our FFB production growth estimate to 15% y-o-y (from 7% y-o-y) for 2018 as we have assumed a higher FFB yield. Our FFB production growth expectation is in line with management guidance of 15-20% y-o-y. FFB production growth is expected to be supported by improved FFB yields and an increase in new mature areas.
  • …but reduced external FFB intake estimate. External FFB intake increased 17% y-o-y, but accounted for only 16% of our expectation. Thus, we have cut our external FFB intake forecast by 9% to 1.5m tonnes (from 1.7 m tonnes).
  • FFB production could be flat q-o-q in 2Q18. Management is expecting a FFB production ratio of 44:56 for 1H18:2H18. For 1Q18, FFB production accounted for about 23% of our full-year estimate. Thus, 2Q18 FFB production is likely to come in flat q-o-q. Meanwhile, the lagged impact from the severe drought in 2015 has fully faded. Normalisation of FFB production is expected to kick-in in 2H18 and production is likely to peak in 3Q18.
  • No contribution from biodiesel operations as Bumitama Agri plans to sell biodiesel plant. There has been no contribution from biodiesel operations as Bumitama Agri had stopped biodiesel deliveries since Dec 17. 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.
  • New planting target of 3,000ha. Management is targeting to plant 3,000ha of new areas in 2018. As of 1Q18, management has planted 770ha.


EARNINGS REVISION/RISK

  • No change in earnings estimates. We maintain our net profit forecasts for 2018-20 at Rp1,252b, Rp1,366 and Rp1,476b respectively. This is because the increase in our internal FFB production growth estimate was offset by the decrease in external FFB intake estimates.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower target price of S$0.80 (from S$0.96), as we adjust our ascribed 2018F PE to 11x from 13x, or from its 5-year mean PE to -1SD of 5-year mean. The lower PE multiple is in-line with sector peers’ ascribed PE of -1SD of its 5-year mean due to the weak CPO price outlook in 2018.
  • We maintain BUY as Bumitama Agri’s share price has been lagging behind peers’ even though the company is expected to deliver net profit growth of 7% y-o-y for 2018 in contrast to peers who are likely to record negative earnings growth in 2018 as their FFB production growth is not likely to offset the decline in their CPO ASPs. 
  • We also 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.


SHARE PRICE CATALYST

  • Higher-than-expected FFB production.





Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-09
SGX Stock Analyst Report BUY Maintain BUY 0.80 Down 0.960



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