Bumitama Agri - UOB Kay Hian 2019-05-15: 1Q19 Unexpected High Expenses; FFB Production In Line

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

Bumitama Agri - 1Q19: Unexpected High Expenses; FFB Production In Line

  • BUMITAMA AGRI LTD. (SGX:P8Z) reported core net profit of Rp26b, excluding forex gains of Rp84.2b. Results were below our expectation mainly due to higher operation costs (fertilizer and logistic cost) and financing cost which was mainly affected by higher LIBOR.
  • FFB production is in line with our expectation, and we expect higher FFB production over next three quarters. Selling expenses should be normalised in 2Q19 as most of the high-cost barges contracts will end.
  • Maintain BUY. Target price: S$0.81.



1Q19 RESULTS


Below expectations.

  • BUMITAMA AGRI LTD. (SGX:P8Z) reported core net profit of Rp26b (-88.2% q-o-q, - 87.5% y-o-y) after excluding a forex gain of Rp84.2b. Results were below expectation due to higher selling expenses and financing cost.

Higher selling and interest expenses.

  • Selling expenses increased 1.0% q-o-q and 84.1% y-o-y in 1Q19. The unexpectedly higher selling expense was attributed to:
    1. additional barges were rented to expedite loading and delivery of palm products to support higher sales volume, and
    2. higher fertiliser application (higher cost due to depreciation of rupiah and higher fertiliser volume applied).
  • Higher interest expenses, which increased by 5.0% q-o-q and 22.8% y-o-y, were mainly attributed to the higher interest rate as a result of higher LIBOR.

FFB production in-line with our expectation.

  • FFB production from nucleus areas up 2.0% y-o-y, while total FFB processes up by 4.0% mainly came from higher FFB production from plasma areas (+6.4% y-o-y) and third party purchases (+5.7%). 1Q19 nucleus FFB was contributing about 18.5% of our full year expectation (2.6m tons or +11% y-o-y).


STOCK IMPACT


Production is expected to pick up over next three quarters.

  • Management maintains its guidance for FFB production growth of up to 15% y-o-y for 2019 vs our expectation of +11% y-o-y. Our conservative forecast is based on a higher base in 2018 with an increment of 28% y-o-y and fewer new mature areas.
  • We reckon that Bumitama Agri should be able to meet our production expectation, as it will be entering a higher production cycle in 2H19. Management had also guided that FFB production for 2019 may come in at 42% in 1H19 and 58% in 2H19.

Lower selling expenses for 2Q19.

  • The unexpectedly high selling expenses can be mainly attributed to additional barges rented. 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 with a fixed contract period (eg 6-12 months’ contract) to facilitate the logistics issue.
  • We expect the selling expenses to be normalised in 2Q19, given that most of the contracts will come to an end.

Capex of Rp1t for 2019.

  • Management intends to increase the processing capacity of mills, infrastructure as well as set up a tissue culture research and development centre in Central Kalimantan.

Lower new planting target of 2,000ha.

  • Management targets to plant 2,000ha of new areas in 2019. For 1Q19, Bumitama Agri only planted about 29ha. New planting for the upcoming years are 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.


EARNINGS REVISION/RISK


No change to earnings forecasts.

  • We forecast EPS of Rp718, Rp893 and Rp951 for 2019-21 respectively. We factor in FFB production growth of 11% y-o-y and blended net ASP of Rp7,100/kg for 2019 (based on our CPO price assumption of RM2,350/tonne net of taxes and at a discount to Dumai prices).


VALUATION/RECOMMENDATION

  • 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).


SHARE PRICE CATALYST

  • Higher-than-expected CPO prices.
  • Higher-than-expected FFB production.





Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-05-15
SGX Stock Analyst Report BUY MAINTAIN BUY 0.810 SAME 0.810



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