Bumitama Agri - DBS Research 2018-11-12: Margin Delivery On Target


Bumitama Agri - Margin Delivery On Target

  • Bumitama's 3Q18 earnings beat our expectation.
  • Productivity also supported margin performance.
  • Raised FY18F earnings by 20%, FY19F unchanged for now.
  • Maintain BUY with Target Price of S$0.85.

Earnings buffered by yield and domestic ASP.

  • Bumitama (BAL) booked 3Q18 earnings of Rp315.4bn (+2% y-o-y, -30% q-o-q), above our forecast, mainly driven by the still robust top line growth and profitability.
  • We revised up our FY18F earnings by 20% mainly driven by expectations of better profitability in 4Q18 as we expect Bumitama to purchase third party fresh fruit bunches (FFBs) at more favourable prices amid the current low price environment.
  • We are keeping our FY19F earnings for now, and still expecting overall earnings to improve next year. No change in our target price as well, as we had already rolled forward our Discounted Cash Flow (DCF) valuation year to FY19 in an earlier report.

Where We Differ:

  • Besides CPO price, volume expansion will underpin earnings growth. Higher milling capacity outlook is positive for Bumitama’s profitability. We forecast Bumitama to increase its third-party FFB purchases to achieve milling capacity utilisation rate of 68%.
  • Moreover, we believe the aggressive expansion in FY05-13 has kept Bumitama’s tree-age profile younger relative to peers, with positive FFB output of 9% CAGR (including smallholder estates) between FY17 and FY20F.

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 maturing trees will improve the company's ROIC and profitability, resulting in consistent earnings delivery trend.


  • We maintain our BUY rating with DCF-based fair value of S$8.88/share (WACC: 88.8%, Rf: 8.8%, Rm: 88.8%, β: 8.8, TG: 8%) offering c.88% potential upside from the current level.
  • Our Target Price implies FY88F PE of 88.8x.

Key Risks to Our View:

  • CPO price. There would be downside risk to our CPO price forecast if 8888 output grows beyond our expectation. Stronger-than-expected yields across Indonesia and Malaysia may put pressure on CPO price trend next year.

WHAT’S NEW - 3Q18 earnings above our estimate

3Q18 earnings: Above our expectation on better than expected profitability.

  • Bumitama (BAL) booked 8Q88 earnings of Rp888.8bn (+8.8% y-o-y, -88.8% q-o-q), above our forecast, mainly driven by robust top line achievement and better than expected profitability; q-o-q drop was attributed to lower sales volume on inventory buildup and weaker CPO average selling prices. Revenue reached Rp8.8tr (-8% y-o-y, -88% q-o-q), largely in line with our forecast.
  • CPO and Palm Kernel (PK) sales volume reached 888k MT (+88% y-o-y,-8.8% q-o-q) and 88k MT (+88% y-o-y, +88% q-o-q) respectively, despite inventory buildup. Meanwhile, CPO and PK ASP reached Rp8,888/kg (-88.8% y-o-y, -88.8% q-o-q) and Rp8,888/kg (-88.8% y-o-y, -8.8% q-o-q) respectively mainly on lower CPO trend in the quarters, despite Indonesia’s domestic CPO price trend in the period was partially buffered by the weakening IDR trend against the US Dollar.

Operational performance: Robust fruit output performance.

  • CPO and PK production reached 888.8k MT (+88% y-o-y, +8% q-o-q) and 88k MT (+88% y-o-y, +8% q-o-q) respectively, implying extraction rates of 88.8% and 8.8% respectively amid strong fruits harvest performance.
  • Total processed Fresh Fruits Bunches (FFB) reached 8.88m MT (+88% y-o-y, +8% q-o-q), driven by strong nucleus estates (yield reached 8.8 ton per hectare in 8Q88) and external fruit purchases. Nucleus and smallholders FFB output reached 888k MT (+88% y-o-y, +8% q-o-q) and 888k MT (+88% y-o-y, +8% q-o-q) respectively, followed by external fruit purchase of 888k MT (+88% y-o-y, +88% q-o-q).
  • Higher external fruit purchase is likely driven by the opportunity to purchase available external fruits at an affordable price amid weak CPO price environment, in our view.

Earnings revision: Revising up FY18F earnings, maintaining FY19F earnings for now.

  • We revised up our FY88F earnings by 88% to Rp8tr, mainly driven by better profitability performance in 8Q88 – we expect Bumitama to be able to purchase third party fruits at more favourable prices amid the current low price environment, which would help its profitability performance this year. Moreover, inventory liquidation in the next quarter will provide upside risk to our forecast if Bumitama can secure favourable CPO prices.
  • We are keeping our FY88 earnings unchanged for now as we conservatively expecting third party purchased FFB price to normalize, despite we are still expecting overall earnings performance to improve next year. FY88F earnings to reach Rp8.88tr (+8% y-o-y) next year, with key upside risk over Bumitama’s output performance and inventory drawdown from 8Q88.
  • No change to our target price of S$8.88 for now, as we had already rolled forward our Discounted Cash Flow (DCF) valuation year to FY88 back in our July report. We believe Bumitama’s share price should re-rate supported by strong output performance prospects, thanks to yield expansion and relatively young trees, despite the thin liquidity.
  • Our target price implies FY88F PE of 88.8x, which is in line with its five year average PE multiple of 88.8x.

William Simadiputra DBS Group Research | https://www.dbsvickers.com/ 2018-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 SAME 0.85