Bumitama Agri - DBS Research 2018-10-10: Defensive Play On Decent Yield Performance

BUMITAMA AGRI LTD. (SGX:P8Z) | SGinvestors.io BUMITAMA AGRI LTD. (SGX:P8Z)

Bumitama Agri - Defensive Play On Decent Yield Performance

  • Domestic ASP and yield to provide a buffer to 2019 earnings.
  • Pure upstream play to leverage on CPO price swing.
  • Young trees underpin strong growth potential.
  • Maintain BUY with lowered Target Price of S$0.85.



Earnings buffered by yield and domestic ASP.

  • Our minor earnings forecast adjustment reflects Bumitama Agri (BAL)’s resilient yield performance to offset cost escalations. 
  • Bumitama Agri 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. Domestic CPO ASP would benefit from a weakening IDR trend against the US dollar.


Where We Differ: Besides CPO price, volume expansion will underpin earnings growth.

  • 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 its 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.



~ SGinvestors.io ~ Where SG investors share

Potential catalyst: Re-rating on performance delivery.

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


Valuation:

  • We maintain our BUY rating with discounted cash flow (DCF)- based fair value of S$0.85/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.


Balance Sheet:

  • Bumitama Agri’s balance sheet should be able to withstand any downcycles. Bumitama Agri’s net gearing ratio is forecast to settle at 30% by the end of FY18 and 20% at end-FY19. On our estimates, Bumitama Agri’s borrowing costs should continue to remain lower than peers.
  • Bumitama Agri’s interest coverage is forecast to average 7.8x in FY18 and 8.9x in FY19.


Share Price Drivers:


No urgency to expand downstream.

  • On our estimates, Bumitama Agri’s mature estates are due to expand by 500 ha in FY18F, followed by 2,600 ha in FY19F (reflecting the lack of new expansion in FY14 – as the group is working towards ensuring sustainable development).
  • Bumitama Agri’s milling capacity should nevertheless expand through FY21F, and we should see expansion of its workforce to process the exponential growth in harvested FFB. Until its CPO output reaches critical mass of 1m MT or more, we do not see Bumitama Agri expanding downstream. 
  • Bumitama Agri’s relatively higher margins (even with export tax policies) – vis-à-vis integrated players – should maximise its shareholders’ return on equity, in our view.

Steady expansion ahead.

  • Having committed itself to a sustainable development programme, the group has slowed its expansion since FY14, and intends to undertake a more sustainable 3,000-ha p.a. expansion pace (including smallholder estates) from FY17F onwards.


Key Risks:


Where we may go wrong.

  • Our earnings expectations and valuation are based on several key assumptions. Any setback in FFB yields (due to severe weather) or expansion (i.e. lower than 3,000 ha p.a.) would adversely impact our long-term forecast and valuation.
  • Bumitama Agri’s share price is also linearly driven by CPO price expectations and partly by rupiah movements. A drop in CPO prices may drag the share price below our fair value, and vice versa.





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2018-10-10
SGX Stock Analyst Report BUY MAINTAIN BUY 0.880 SAME 0.880



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