Bumitama Agri - UOB Kay Hian 2019-02-27: 4Q18 Within Expectations; Strong Production Mitigates Impact From Low ASP

BUMITAMA AGRI LTD. (SGX:P8Z)

Bumitama Agri - 4Q18: Within Expectations; Strong Production Mitigates Impact From Low ASP

Bumitama Agri’s 2018 results were within expectation. Net profit came in lower y-o-y due to lower ASP and higher operating expense (higher logistics cost). This was a good set of results, given its profit contraction was smaller than pure upstream peers’.
The impact from lower ASP was offset by strong production growth. 2019 earnings growth would be driven by production growth and we expect dividend payout to increase with better cash flow.
Maintain BUY. Target price: S$0.81.

BUMITAMA AGRI LTD. (SGX:P8Z) reported 4Q18 core net profit of Rp224b (- 24.8% q-o-q, -37.8% y-o-y) and 2018 core net profit of Rp1,133b (-3.4% y-o-y).
Earnings were within expectations. This was a good set of results for a pure upstream player as its 2018 CPO ASP was down 13.2% y-o-y and fertiliser cost was higher due to the rupiah depreciation. Despite this, Bumitama Agri’s core net profit fell only 8.1% y-o-y, attributed to a strong FFB production growth of 28.3% y-o-y.

Operating cost in 4Q18 increased significantly due to higher selling expense on the back of additional foreight cost.
In 4Q18, Bumitama Agri took efforts to charter barges to deliver CPO to buyers direclty as buyers were reluctant to engage barges due to high rates. Although this incurred higher costs, at least BAL managed to bring down inventory to normal levels.

This was mainly due to higher operating expenses despite better revenue on higher production and sales volume. The unexpectedly higher selling expense was attributed to:
1. higher fertiliser application (higher cost due to depreciation of rupiah); and
2. additional barges were rented to expedite loading and delivery of palm products to support higher sales volume.
Recall in 3Q18, Kalimantan players were affected by the logistics bottleneck due to insufficient vessels to transport CPO to buyers. Bumitama Agri rented additional barges to facilitate the logistics issue. Shipping companies normally charge higher rates with the huge demand for logistics services.

Bumitama Agri reported FFB production growth of 28.3% y-o-y for 2018, which was above management guidance of +25% y-o-y. The high production came mainly from better FFB yield of 20.4 tonnes/ha for 2018, which crossed the 20 tonnes/ha mark for the first time.
Both nucleus and plasma areas contributed to this record FFB yield. We expect further improvement in FFB yield in 2019 from its young areas.

Management guided for a lower FFB production growth of 15% y-o-y for 2019. However, we remain conservative and forecast FFB production growth at 12% due to a higher base and fewer new mature areas.
We are also concerned that the relatively lower rainfall in 2H18 might impact yields in 2H19.

Management targets to plant 2,000ha of new areas in 2019. For 2018, total new planted area was 2,490ha (87% under nucleus areas). New planting is expected to be slow as the cost of planting is rising and the returns for investment are not attractive as new planting is moving into less fertile land.

We forecast EPS of Rp718, Rp893 and Rp951 for 2019-21 respectively. We factor in FFB production growth of 12.6% y-o-y and blended net ASP of Rp6,988/kg for 2019 (based on our CPO price assumption of RM2,350/tonne net of taxes and at a discount to Dumai prices).

Maintain BUY and target price of S$0.81, based on 11x 2019F PE, or -1SD of its 5-year mean. This is in line with sector peers’ PE of -1SD to the 5-year mean due to the weak CPO price outlook in 1H19.
We like Bumitama Agri for its young tree age which spells strong production, as well as its hands-on estate management which has allowed Bumitama Agri to consistently deliver high OER.
Bumitama Agri’s cash flow should improve with less dilution from new mature areas while mature trees are moving into the high production age (7 years and above).

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-27

SGX Stock Analyst Report BUY MAINTAIN BUY 0.810 SAME 0.810