Bumitama Agri (BAL) - UOB Kay Hian 2018-07-16: Success Starts With A Single Step

Bumitama Agri (BAL) - UOB Kay Hian Research 2018-07-16: Success Starts With A Single Step BUMITAMA AGRI LTD. SGX:P8Z

Bumitama Agri (BAL) - Success Starts With A Single Step

  • Bumitama Agri BAL is likely to outperform peers in 2Q18 with a net profit of Rp360b-400b, better q-o-q and y-o-y on the back of stronger FFB production.
  • Management has been putting in efforts to improve group FFB yield and BAL is starting to see a better FFB yield recovery and has sustained its high OER despite high third-party fruit intake.
  • We adjust our 2018 net profit forecast upwards by 14% to factor in the higher FFB production growth. Maintain BUY with a higher target price of S$0.93.



WHAT’S NEW

  • 2Q18 likely to be another quarter of outperformance. Bumitama Agri (BAL) targets to announce its 2Q18 results on 14 Aug 18 before the market opens. We are expecting BAL to report a 2Q18 net profit of Rp360b-400b (1Q18: Rp211b, 2Q17: Rp284b). The better earnings would be supported by record-high FFB production. BAL is likely to report record- high FFB production in 2Q18 on the back of a strong FFB yield recovery and new mature areas. But this would have been partly offset by weaker CPO prices. Average Dumai/Belawan CPO price has weakened to US$619/tonne in 2Q18 (-4.0% q-o-q, -8.4% y-o-y).
  • Active with yield improvement programme. Over the last 2-3 years, management has been putting in efforts to mitigate the impact from weather disruptions to improve FFB yields. These efforts have translated into better FFB yields. These efforts include:
    1. Water management at key targeted areas (ie building more water catchment areas in preparation for dry days and to facilitate better drainage to mitigate flooding). As water is a key component to driving oil palm tree fruition, BAL has been putting in increased efforts to developing its water management system in the past few years. These efforts have started to bear fruit with 2Q18 FFB yield expected to jump q-o-q and y-o-y.
    2. Breeding weevils. Other initiatives taken to raise productivity include the setting up of weevil hatcheries to increase pollination which will raise FFB yield. This will help especially during the rainy season when weevils are less active.
    3. Reusing waste to conserve soil moisture and nutrients. This involves wider application of palm oil waste, such as empty fruit bunches (EFP) and palm oil mill effluent (POME) into fields. Wider application of EFB in estates would provide nutrients for palm trees and help conserve soil moisture. POME is rechanneled back to the fields through an extensive piping system to provide moisture and nutrients to the oil palm trees. This report is shared at SGinvestors.io.


STOCK IMPACT

  • Adjusted internal FFB production growth target upwards. Management is expecting a FFB production ratio of 44:56 for 1H18:2H18. We understand that 2Q18 FFB production will be a record-high for BAL, which is a surprise to us as we were expecting 2Q18 FFB production to be flat q-o-q. We are adjusting our FFB production growth estimate to 36% y-o-y (from 15% y-o-y) for 2018 as we have assumed a higher FFB yield. We are expecting management to revise up its FFB production growth guidance in the upcoming 2Q18 results briefing. FFB production growth is expected to be supported by improved FFB yields and an increase in new mature areas. This report is shared at SGinvestors.io.
  • Reduced external FFB intake estimate. As we are expecting higher internal FFB production, we have cut our external FFB intake forecast by 39% to 1.0m tonnes (from 1.5 m tonnes).
  • FFB production grew at a 10-year CAGR of 21%. BAL’s 10-year FFB production CAGR is at 21% for the period of 2009-19. FFB production registered a marginal drop in 2016 due to the severe El Nino in 2015. We saw a recovery in FFB production in 2017 on the back of a yield recovery. We are expecting a surge in FFB production in 2018 on the back of strong FFB yield recovery as the lagged impact from the severe drought in 2015-16 has fully faded.
  • EBITDA/metric tonne of CPO is comparable to industry average. EBITDA/metric tonne of CPO moves in tandem with CPO prices. BAL’s EBITDA/metric tonne of CPO is comparable to the industry average. We noticed that higher external fruit intake will lower EBITDA/metric tonne of CPO due to higher operating costs involved. BAL’s EBITDA/metric tonne of CPO should improve going forward, when internal FFB production contribution increases and there is less reliance on external FFB production to boost mills’ utilisation rate.


EARNINGS REVISION/RISK

  • Adjusted earnings forecasts upwards. We are adjusting our net profit forecasts upwards by 14%, 9% and 2% respectively for 2018-20 to factor in the higher FFB production growth which would be supported by higher FFB yields but would partly be offset by lower external fruit intake. 
  • We forecast a net profit of Rp1,427b, Rp1,485 and Rp1,501b respectively for 2018-20.


VALUATION/RECOMMENDATION

  • Maintain BUY with a higher target price of S$0.93 (from S$0.80), post earnings forecast adjustments. Our target price is based on ascribed 2018F PE to 11x or -1SD of its 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 (BAL)’s share price has been lagging behind peers’ even though the company is expected to deliver net profit growth of 22% y-o-y for 2018 in contrast to peers who are likely to record negative earnings growth in 2018 as FFB production growth is not likely to offset the decline in CPO ASP. We also like BAL 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 BAL to consistently deliver a high OER. This report is shared at SGinvestors.io.


SHARE PRICE CATALYST

  • Higher-than-expected FFB production.





Leow Huey Chuen UOB Kay Hian Research | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-07-16
SGX Stock Analyst Report BUY Maintain BUY 0.93 Up 0.800



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