Bumitama Agri - DBS Research 2020-05-12: Good Start, But Stay Vigilant

BUMITAMA AGRI LTD. (SGX:P8Z)

Bumitama Agri - Good Start, But Stay Vigilant

Bumitama Agri's 1Q20 earnings largely in line with our expectations.
Expecting lower q-o-q earnings from 2Q20 onwards, in line with our lower average CPO price trend.
Undemanding valuation, but liquidity is thin.
Maintain Buy with a lower Target Price of S$0.66.

Bumitama Agri (SGX:P8Z) posted 1Q20 NPATMI of Rp262bn (+137% y-o-y, flat q-o-q), largely in line with our forecast, supported by higher palm oil prices in the quarter, albeit lower CPO sales volume. The higher palm oil price and relatively stable overall cost trend helped Bumitama Agri to achieve better profitability.
Revenue reached Rp2.0tr (+20% y-o-y, -12% q-o-q) driven by
1. higher CPO ASP of Rp8,707 per kg (+33 y-o-y, +22% q-o-q) and sales volume of 294k MT (-7% y-o-y, -29% q-o-q);
2. higher PK ASP of Rp4,434 per kg (+9% y-o-y, +37% q-o-q) and 44k MT (-12% y-o-y, -24% q-o-q).
The sales volume trend followed the CPO and PK production trend of 231.5k MT (+3% y-o-y, -16% q-o-q) and 47.7k MT (+6% y-o-y, -17% q-o-q) respectively, on stable extraction rate of 22.9% and 4.7%.
Processed fruits was 1m MT (flat y-o-y, -15% q-o-q) affected by seasonal low production in 1Q20 vs. 4Q19. The flat y-o-y production reflected the broad industry trend; in Malaysia trees hit yield exhaustion after performing strongly in 2017- 2019. The trend across its own fruits and external fruits was in line. Own, plasma and external fruits reached 483k MT (flat y-o-y, -15% q-o-q), 228k MT (+2% y-o-y, -14% q-o-q) and 294k MT (-2% y-o-y, -16% q-o-q) respectively, and this helped Bumitama Agri’s to achieve good earnings performance by maximising the higher CPO price in 1Q20.

Despite the good result, we cut our Bumitama Agri's FY20/21F earnings by 9% and 11% to Rp730bn/Rp763bn, assuming higher input cost from external fruits and fertilisers. Our CPO ASP projection of Rp7,108 per kg (+6% y-o-y) for FY20 already reflects any anticipated price weakness ahead, which will result in average net earnings of around Rp150bn in next few quarters, which is lower than 1Q20 earnings.
We assume nucleus CPO cash cost to grow by 8% y-o-y, ahead of management guidance of flat to 5% y-o-y increase, as we expect the weakness in IDR will lead to higher fertiliser cost.
Furthermore, we have already taken a conservative stance for 2021 ASP of Rp6,802 per kg (-4% y-o-y), as we expect the earnings growth in 2021 to be driven by volume expansion from 4,000ha trees maturing starting 2020 rather than CPO price recovery.
We also assumed Rp593bn for capital expenditure in 2020, higher than our previous estimate, but lower than management’s guidance of up to Rp1trn, subject to be revised lower if palm oil prices remain challenging ahead.

We maintain our BUY rating with lower DCF-based Target Price of S$0.66 per share, on lower earnings but higher capex assumption.

Bumitama Agri is trading at 11.1x FY20F PE, which we believe undemanding and we note that the share price did not stage a rebound post the COVID-19 sell-off at the end of March.
See Bumitama Agri Share Price; Bumitama Agri Target Price; Bumitama Agri Analyst Reports; Bumitama Agri Dividend History; Bumitama Agri Announcements; Bumitama Agri Latest News.
Liquidity has also played a role, but we believe the market should not ignore Bumitama Agri on this issue alone, given that the estates are well managed, with low nucleus CPO cash cost level around Rp4,500 per kg.
We believe the sell-off was due to concerns over palm oil prices amid the weakness in demand from buyers, like India, that are still in lockdown, and Indonesia’s biodiesel program prospects. However, we believe Bumitama Agri’s valuation has reflected these challenges, and lower than expected CPO price ahead. We estimate the market is valuing Bumitama Agri at a CPO price of US$430-450 per MT in 2020-onwards, which we believe is conservative, as key buyers are not able to produce their own palm oil.

William Simadiputra DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-12

SGX Stock Analyst Report BUY MAINTAIN BUY 0.66 DOWN 0.810