Bumitama Agri - DBS Research 2018-08-14: Strong Performance Amid Low CPO Price Cycle

BUMITAMA AGRI LTD. SGX:P8Z

Bumitama Agri - Strong Performance Amid Low CPO Price Cycle

Bumitama (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.

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Volume expansion to grow earnings besides CPO price. Higher milling capacity outlook is positive for Bumitama Agri’s profitability. We forecast Bumitama Agri 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 Bumitama Agri’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.

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.

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.26% potential upside from the current level. Our Target Price implies FY19F PE of 13.7x.

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.

Bumitama (BAL) booked 2Q18 earnings of Rp452m (+34% y- o-y, +65% q-o-q) – slightly ahead of our expectations. Top line reached Rp2.35tr (+22% y-o-y, +23% q-o-q). The strong y-o-y growth in revenue and earnings was led by 28%/31% growth in CPO and PK sales volumes to 266,000 MT (+29.6% q-o-q) and 49,700 MT (+11.2% q-o-q) respectively.
CPO and PK prices reached Rp7,786 per kg (-3.4% y-o-y, - 0.6% q-o-q) and Rp5,482 per kg (-1.3% y-o-y, -17.2% q-o-q). The weakening Rupiah against US Dollar in 2Q18 benefitted Bumitama Agri’s Rupiah-based CPO and PK pricing , minimising the impact on weaker CPO price y-o-y.
Moreover, Bumitama Agri saw an inventory build-up during the quarter which consist of CPO and fertilisers. Bumitama Agri’s 1H18 fertiliser application only reached 46% of its full-year target vs. 1H17’s 70%. The fertilising activities will occur in 3Q18.

Bumitama Agri’s own fresh fruit bunch (FFB) output for the quarter improved 32% q-o-q/25% y-o-y to c.620,000 MT. Smallholders FFB declined for the quarter to c.291,000 MT but improved 25% y-o-y. FFB yield recovered to beyond pre-El Nino levels at 5.5 MT/ha (2Q17: 4.6 MT/ha). Bumitama Agri continues to guide for 15-20% growth in FFB output for the year.
Meanwhile, FFB purchase from smallholders and external reached 290,000 MT (+25% y-o-y, +38% q-o-q) and 356,000 MT (+53% y-o-y, +26% q-o-q) respectively, sending the total processed FFB to 1.27m MT (+32% y-o-y, +31% q-o-q).
The double-digit processed FFB expansion yielded strong CPO and PK production of 278,000 MT (+28.1% y-o-y, +27% q-o-q) and 57,000 MT (+34% y-o-y, +28% q-o-q) respectively, which led to robust sales volume performance.

We conservatively maintain our FY18 and FY19 earnings forecast of Rp1tr (-12.6% y-o-y) and Rp1.2tr (8% y- o-y), with main key upside risk on stronger-than-expected yield performance in 2H18 and lower-than-expected fertiliser cost.
Note that we estimate the margin in 2H18 may be affected by fertilising activities that are carried forward to 2H18.

Bumitama (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.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2018-08-14

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