Bumitama Agri - RHB Invest 2019-11-12: Highly Sensitive To CPO Prices; Raise to BUY


Bumitama Agri - Highly Sensitive To CPO Prices; Raise to BUY

  • Upgrade to BUY from Neutral, new P/E-based SGD0.69 Target Price from SGD0.60, 16% upside plus 3.4% FY20F yield.
  • Bumitama Agri’s 9M19 core earnings surpassed our expectations, coming in at 80% of our FY19 forecast – but were below consensus, at 45%. We raise our FY19-21 forecasts 12-14% to account for lower-than-expected unit costs.

Earnings rebounded in 3Q19

  • Despite weaker-than-expected FFB growth and lower product prices, BUMITAMA AGRI (SGX:P8Z)'s earnings rebounded in 3Q19, likely due to lower unit costs. Unit costs fell 17% q-o-q in 3Q19 due to improved output. See Bumitama Agri Announcements.
  • 3Q19 FFB output rose 12.8% q-o-q, bringing 9M19 FFB growth to -3.8% y-o-y. This was below management’s 2019 growth guidance of 5-8% and our projection of 2.8%.
  • Bumitama Agri’s average CPO price fell 12.8% y-o-y to IDR6,514kg, while PK prices dropped by a larger 38% y-o-y to IDR3,478/kg.

Briefing highlights:

  1. It is lowering its 2019 FFB growth estimate to flat from 5-8%.The weather at its estates in Kalimantan has now normalised, after being dry for the bulk of 3Q19. Management is adjusting its guidance to a 45:55 ratio (from 43:57) for FFB output in 1H:2H. We have therefore also reduced our FFB growth projection to flat for FY19 from 2.8%, while leaving our 10-15% growth for FY20F-21F intact;
  2. 3Q19 unit cost of IDR3,952/kg was 17% lower q-o-q but 15% higher y-o-y, due to higher fertiliser application (83% of FY19 requirements vs 60% applied in 9M18) and prices (+10%), as well as increased fuel (+7%) and wage (+8%) costs. Management is now guiding for FY19 unit costs to rise 10% y-o-y from +5% y-o-y previously. This implies that 4Q19 will see a q-o-q reduction in unit costs, likely due to lower remaining fertiliser application of 17% in 4Q19 vs 40% in 4Q18. We had already conservatively imputed a 10-15% increase for FY19, but are now reducing it to 10% increase.
  3. Management does not do any forward selling currently, and is sticking with its CPO price budget of MYR2,300/tonne for 2019.

Upgrade to BUY.

  • We raise our FY19F-21F earnings by 12-14%, after imputing slightly lower unit cost assumptions.
  • Our Target Price rises to SGD0.69 from SGD0.60, post earnings revision. We maintain our target P/E of 16x 2020F, which is 1SD above its historical average. See Bumitama Agri Share PriceBumitama Agri Target Price.
  • Our Target Price implies an EV/ha of USD11,000 – at the low end of the peer range of USD10,000-15,000/ha. We believe earnings have turned a corner, with FFB output recovery being seen at its estates.
  • Bumitama Agri is a pure upstream company, and will benefit from the hike in CPO prices, where every MYR100/tonne change in CPO prices affects its earnings by 8-10%.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-12
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 0.69 UP 0.600