Bumitama Agri - RHB Invest 2020-07-27: Valuation Attractive, Look To FY21F; Upgrade To BUY


Bumitama Agri - Valuation Attractive, Look To FY21F; Upgrade To BUY

  • Upgrade to BUY from Neutral, higher SGD0.60 Target Price from SGD0.48, 20% upside and c.3% yield.
  • With the markets in a liquidity-driven rally, we believe cyclical sectors like plantations could be the next play, providing investors with a relatively safe haven, in terms of earnings. Nevertheless, we caution of a possible pullback in CPO prices in 4Q20 and continue to advocate buying stocks which are still trading at decent valuations.
  • We believe Bumitama Agri (SGX:P8Z), being a pure planter, would benefit from the recent price rise, while valuation remains attractive.

CPO prices have rallied of late

  • CPO prices have rallied of late to current levels of MYR2,739/tonne. While we do not see any significant catalyst that could have caused this rerating other than the recently released Malaysian plantation statistics – which were a positive surprise – we believe much of the rally could have been caused by the current liquidity in the market. This liquidity has cut across all asset classes – not just for equities, but also for fixed income and commodities.
  • That said, we believe CPO prices are likely to hold relatively steady in 3Q20, given that CPO production only started ramping up in June, while pent-up demand is likely to continue until at least August or September, in light of the Deepavali festival in November.

4Q20 should see a pullback of prices

  • Post-3Q20, we continue to hold our view that 4Q20 should see a pullback of prices on the back of the impact of the seasonal peak production which will end in 4Q20 and lower post-festive demand.
  • On the whole, however, CPO prices in 2020 are expected to be 13% higher than that of 2019, while production for most planters, particularly those in Indonesia, will be higher. This means earnings will be stronger y-o-y in 2020, as well as in 2021, given our assumption of a higher MYR2,500/tonne CPO price. This security of earnings, we believe, will give investors a reason to invest in the sector – provided that valuations make sense, of course.

Upgrade Bumitama Agri to BUY.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-07-27
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 0.60 UP 0.480