Bumitama Agri - RHB Invest 2020-01-20: Imputing Higher CPO Prices; Maintain BUY

BUMITAMA AGRI LTD. (SGX:P8Z)

Bumitama Agri - Imputing Higher CPO Prices; Maintain BUY

BUY, new target price with 24% upside plus c.3% FY20F yield. See Bumitama Agri Target Price. After imputing our revised CPO prices assumptions, we lift our earnings forecasts for FY20-21 by 13-23%.

Since BUMITAMA AGRI (SGX:P8Z) is a pure upstream producer, we believe it will be able to capitalise on higher CPO prices and deliver better earnings in 1H20. Its valuation remains attractive at 14x FY20 P/E, which is at a discount to its regional peers, as well as the averages of its SGX-listed peers.

CPO prices have risen sharply to > MYR3,000/tonne. While we had expected an improvement in prices towards the year-end, the strength of the price rally caught us by surprise. We believe there could be a slight correction, as there could be some speculative elements at play. Nevertheless, we expect prices in 1H20 to remain high at MYR2,700-3,100/tonne, before seasonally weakening to a range of MYR2,400-2,700/tonne in 2H20.

Given this scenario, we increase our CPO price forecasts up to MYR2,600/tonne for 2020 while leaving our 2021 forecasts intact at MYR2,500/tonne. This will imply a substantial 22% y-o-y increase in CPO prices from 2019’s average of MYR2,129/tonne. With this, the plantation companies’ earnings are expected to re-rate upwards significantly, particularly as the leverage of CPO price change to earnings is much more significant than that of FFB output growth.
For the firms under our coverage, every MYR100/tonne change in CPO prices impacts earnings by between 4% and 18% pa. We expect to start seeing the impact of strong CPO prices on earnings from the 4Q19 reporting period onwards, ie Feb 2020, which could trigger another round of share price retracement.
Despite the run-up in share prices, we believe there is still upside for some stocks, as our sensitivity analysis indicates that most of our stock picks are still reflecting CPO prices of c.MYR2,400-2,500/tonne.

We continue to remain positive on the sector’s fundamentals and believe there are three key factors that will keep CPO prices high in 2020:
- A CPO deficit is imminent this year, as demand growth outstrips supply growth and stock/usage ratios fall below historical averages;
- Biodiesel – the largest demand catalyst – is still very much a “GO” in Indonesia and Malaysia;
- Food demand should remain strong from China and India.
See See Bumitama Agri Share Price; Bumitama Agri Analyst Reports.

We maintain our call while target price rises based on an unchanged 16x FY20F P/E, or 1SD above its historical average. See Bumitama Agri Target Price.
Our Target Price implies an EV/ha of USD13,000 – at the low end of the peer range of USD10,000-15,000/ha. We believe earnings have turned the corner, with FFB output recovery being seen at Bumitama Agri’s estates.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-01-20

SGX Stock Analyst Report BUY MAINTAIN BUY 0.95 UP 0.800