Bumitama Agri - DBS Research 2019-02-28: Trading At Discount

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

Bumitama Agri - Trading At Discount

  • Bumitama Agri's 4Q18 results in line with expectations. 
  • Lower CPO price affected 4Q18 performance. 
  • PE multiple below five-year average multiple. 
  • Maintain BUY with unchanged Target Price of S$0.85. 



ASP drove 4Q18 performance – FY18 results in line.

  • BUMITAMA AGRI LTD. (SGX:P8Z) booked 4Q18 earnings of Rp253bn (-43% y-o-y, -23% q-o-q) in line with our estimate on lower overall average selling prices in the quarter. Revenue grew to Rp2.2bn (+7% y-o-y, +15% q-o-q).
  • While CPO and PK sales volume improved to 325 MT (+57% y-o-y, +35% q-o-q) and 53 MT (+28% y-o-y, - 7% q-o-q) respectively for the quarter due to seasonal peak production, revenue was dragged by lower ASP of Rp6,064/kg (-26% y-o-y, -11% q-o-q) and Rp4,353/kg (-42% y-o-y, -12% q-o-q) respectively.
  • Higher selling expenses due to industry-wide logistics issue also caused selling expenses to spike 42% y-o-y/-7% q-o-q, which weighed on net profit.


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 purchases to achieve milling capacity utilisation rate of 68%. Moreover, we believe the aggressive expansion in FY05-13 has kept Bumitama Agri’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.


Valuation:

  • We maintain our BUY rating with 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 13.9x.


Key Risks to Our View:

  • CPO price. There would be downside risk to our CPO price forecast if 2019 output grows beyond our expectation. Stronger-than-expected yields across Indonesia and Malaysia may put pressure on CPO price trend next year in 2019 and 2020.


WHAT’S NEW - Full-year results in line with expectations


Full-year results in line with our expectations.

  • Bumitama Agri booked 4Q18 earnings of Rp253bn (-43% y-o-y, -23% q-o-q), which is in line with our estimate. Revenue grew to Rp2.2bn (+7% y-o-y, +15% q-o-q).
  • While CPO and PK sales volume improved to 325 MT (+57% y-o-y, +35% q-o-q) and 53 MT (+28% y-o-y, -7% q-o-q) respectively for the quarter, revenue was dragged by lower ASP of Rp6,064/kg (-26% y-o-y, -11% q-o-q) and Rp4,353/kg (-42% y-o-y, -12% q-o-q) as CPO price continued to trend down. Higher selling expenses due to industry-wide logistics issue also caused selling expenses to spike 42% y-o-y/-7% q-o-q, which weighed on net profit.

Operational performance continues to improve.

  • CPO and PK production reached 253 MT (+23% y-o-y, -13% q-o-q) and 48 MT (+7% y-o-y, -17% q-o-q) respectively, with extraction rates at 22.2% and 4.2%. Lower extraction rate q-o-q may have affected the external fruit contribution. External fruits tend to have lower extraction rate due to different fruit quality.
  • Total processed Fresh Fruit Bunches (FFB) reached 1.1 MT (+25% y-o-y, -16% q-o-q), as logistical congestion (implying higher transportation costs) led to lesser external FFB purchased (+11% y-o-y, -21% q-o-q), even though external FFB remains affordable amid weak CPO price environment.
  • Total internal FFB for the year at 2.3 MT grew c.28% y-o-y, in line with management’s guidance for FY18.


Minor revisions to FY19 and FY20 earnings forecasts

  • We are keeping our overall FY19 and FY20 earnings forecasts for now as we have anticipated the modest CPO and PK ASP recovery and Fresh Fruits Bunches (FFB) growth of 10% which is at the lower end of management's guidance.
  • Our earnings forecast also well anticipated possible cost escalations, mainly from fertilisers and labour wages of about 10% y-o-y.


Maintain BUY with unchanged Target Price of S$0.85

  • We are keeping our BUY rating with an unchanged Target Price of S$0.85. Our target price implies FY19F PE of 13.9x which is slightly above Bumitama Agri’s five-years average PE multiple of 12.9x.
  • We believe Bumitama Agri’s share price deserves to be re-rated due to its solid operational performance and tree yield expansion potential which both will grow the earnings beyond CPO price trend and keep the profitability strong.
  • Bumitama Agri has a strong balance sheet which could turn into net cash in the next 5-7 years and it is likely to be capable to disburse an attractive dividend payout and yield going forward amid the continuous cash generation capability.





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-02-28
SGX Stock Analyst Report BUY MAINTAIN BUY 0.850 SAME 0.850



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