Bumitama Agri - UOB Kay Hian 2019-02-12: 4Q18 Results Preview ~ Inventory Drawdown Compensates For Weak Selling Prices

BUMITAMA AGRI LTD. (SGX:P8Z)

Bumitama Agri - 4Q18 Results Preview: Inventory Drawdown Compensates For Weak Selling Prices

Based on our earnings estimates, Bumitama Agri is expected to delivery lower q-o-q and y-o-y net profit for 4Q18. 4Q18 core net profit is expected to be in the range of Rp240b-260b on the back of a weaker CPO ASP (yoy and q-o-q) and lower production (qoq).
4Q18 is likely to see the lowest ASP for 2018, but price weakness should have been offset by a higher inventory drawdown with logistics-related issues being resolved gradually.
Maintain BUY. Target price: S$0.81.

BUMITAMA AGRI LTD. (SGX:P8Z) is scheduled to release its 4Q18 results on 26 Feb 19 before the market opens.
Bumitama Agri should be on track to meet our expectation with net core profit likely to be in the range of Rp240b-260b (4Q17: Rp336b, 3Q18: Rp297b). Net profit is expected to be lower y-o-y and q-o-q largely due to lower ASPs.
Kalimantan-based producers faced lower selling prices (vs Sumatra-based producers) as supplies were high and shipments of crude palm oil (CPO) to ports at Sumatra were delayed due to a lack of vessels.

4Q18 FFB production is expected to fall 5-8% q-o-q, in line with the industry’s performance and on track to meet our expectation. However, due to the low base in 4Q17 and mature areas entering their prime production age, FFB production is expected to surge y-o-y.
For 2018, total FFB production is expected to increase 25-30% y-o-y, in line with management guidance. 2019 production growth is likely to be lower due to a high base and fewer new mature areas.

The lower q-o-q production would have been mitigated by higher sales volumes q-o-q. Recall that in 3Q18, earnings were slightly below expectations due to lower-than-expected selling volumes and ASPs.
The shortage of vessels in Indonesia had delayed sales deliveries and led to a significant increase in Bumitama Agri’s inventory (4-5x higher than normal). Based on our channel checks, Kalimantan shipment delays are being resolved and Bumitama Agri’s shipments should have normalised in Dec 18.

4Q18 ASP was lower y-o-y and q-o-q due to a huge supply of CPO and high inventories dragging down selling prices, especially in Kalimantan.
CPO ASPs in other regions were lower than in Sumatra due to insufficient refinery and storage capacities. Thus, to get buyers to take delivery of CPO supplies and reduce pressure on storage capacities, CPO was sold at a discount to market prices.
Refer to the PDF report attached for key statistics summary.

Our target price is based on 11x 2019F PE, or -1SD of its five-year mean, in line with sector peers’ ascribed PE of -1SD to five-year mean due to the weak CPO price outlook for 1H19.
We like Bumitama Agri for its young tree-age profile which spells strong production, as well as its hands-on estate management which has allowed Bumitama Agri to consistently deliver a high OER.
Bumitama Agri’s cashflow should improve with less dilution from new mature areas and as mature trees move into the high production age (7 years and above).

Being a pure upstream player, Bumitama Agri’s earnings are highly sensitive to CPO price movements. Every RM100/tonne of will add 12-13% to our 2019 net profit forecast.

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-12

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