Bumitama Agri - DBS Research 2018-07-02: Shifting To Pure Upstream Play

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BUMITAMA AGRI LTD. SGX:P8Z

Bumitama Agri - Shifting To Pure Upstream Play

• Young trees provide sound growth potential.
• Besides CPO price, output is the key growth driver.
• Yield expansion to hedge against cost escalation.
• Maintain BUY rating with lower Target Price of S$0.88.

Young tree age provides strong potential.

• Bumitama Agri (BAL) is poised to benefit from the lucrative long-term CPO price outlook given its younger tree age of 8.5 years and sizeable plantable land bank.
• Given the high new entrants to the industry at this point, picking up companies with a young tree age and with potential yield expansion to keep their cost low is the best play for our steady CPO price theme.

Where we differ: Volume expansion to grow earnings besides CPO price

• Higher milling capacity outlook is positive for Bumitama Agri (BAL)’s profitability. We forecast BAL to increase its third-party FFB (fresh fruit bunch) purchase to achieve milling capacity utilisation rate of 68%.
• Moreover, we believe aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers, with double-digit fruit output outlook of 8.5% CAGR in FFB output (including smallholder estates) between FY17 and FY19F.

Potential catalyst: Re-rating on performance delivery.

• We believe there is currently an excessive liquidity discount on the counter. Moreover, higher CPO yield on upcoming maturing trees will improve the company's ROIC and profitability, resulting in consistent earnings delivery.

Valuation

• We maintain our BUY rating with discounted cash flow (DCF)-based fair value of S$0.88/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, β: 0.8, TG: 3%) offering c.42% potential upside from the current level.
• Our Target Price implies FY19F PE of 13.7x.

Key Risks to Our View

• CPO price. There would be downside risk to our CPO price forecasts if the 2018 output grows beyond our expectation.
• Stronger-than-expected yields across Indonesia and Malaysia may pressurise CPO price trend next year.

A look at Company's listed history – what drives its share price?

Bumitama’s share price performance vs CPO yield performance relative to sector

• Bumitama's share price had been tracking the CPO yield performance since 2Q12. However, the share price diverged in 2Q16 as yield expansion was not followed by margin expansion.

Operating profit margin as a critical factor 

• Bumitama’s operating profit margin (OPM) is generally able to explain its share price direction in general, with exceptions noted in 2H13 and 2H15.

CPO prices (in IDR) as a critical factor

• Palm oil price is the key catalyst for plantation stocks; the share price movement trend generally tracks the palm oil spot price. However, the outperformance and underperformance of plantation stocks to CPO prices are dictated by the productivity factor, where the stronger- or weaker-than-expected yields have led its share price sensitivity to palm oil price.

William Simadiputra DBS Vickers | Rui Wen LIM DBS Vickers | https://www.dbsvickers.com/ 2018-07-02

SGX Stock Analyst Report BUY Maintain BUY 0.88 Down 0.940