BUMITAMA AGRI LTD. (SGX:P8Z)
Bumitama Agri - Earnings Rebound Not Priced In
- Bumitama Agri's 3Q20 earnings above our expectations on CPO price recovery.
- Strong CPO price momentum to support earnings in 4Q20 and 2021.
- Trading at 12.5x FY21 PE – COVID-19 vaccine and CPO price recovery not priced in.
Bumitama Agri's earnings rebound continued in 3Q20
- Bumitama Agri (SGX:P8Z) reported 3Q20 net earnings of Rp190bn (+0.7% y-o-y, +6.5% q-o-q) above our expectations on stronger than expected sales volume and palm oil prices, largely in line with consensus forecast. CPO and palm kernel (PK) sales volume reached 237.2k MT (-13.5% y-o-y, +6.1% q-o-q) and 48.9k MT (-17.5% y-o-y, -4.4% q-o-q) respectively.
- CPO and PK average selling prices (ASP) reached Rp7,922 per kg (+23.4% y-o-y, flat q-o-q) and Rp3,995 per kg (+30.1% y-o-y, +1.1% q-o-q) respectively. CPO prices lagged benchmark prices in 3Q20, likely attributed to the reintroduction of US$55 per MT of CPO price levies which commenced in June 2020 to support Indonesia’s B30 biodiesel program.
- Total processed fruits reached 1.1m MT (+3% y-o-y, +11.5% q-o-q) with Bumitama Agri's nucleus estate produced fruits leading the way. Nucleus fresh fruit bunches (FFB) reached 569k MT (+3% y-o-y, +12.6% q-o-q), followed by smallholders and externals fruits production of 258k MT (- 0.5% y-o-y, +9.6% q-o-q) and 308k MT (+6.3% y-o-y, +11.1% q-o-q) respectively.
- Nucleus CPO yield was estimated around 4.7MT per hectare, an improvement from last quarter at 4.2MT per hectare although still lower than last year at 5.3MT per hectare. The q-o-q improvement was largely anticipated in line with palm oil trees’ seasonal high production in 2H of the year.
- However, Bumitama Agri’s extraction rate dropped marginally to 22.2% in 3Q20 (vs. last quarter at 22.6%). We suspect it was the result of the quality of external fruits that was affected amid a relatively dry season.
Outlook: Recovery to continue in 2021
- Bumitama Agri has room to further improve its earnings amid current high palm oil prices. We believe that it should finish strong in 4Q20 and continue its earnings growth recovery next year. We forecast earnings to grow by 4.4% y-o-y to Rp763bn before growing further by 8.9% y-o-y to Rp831bn in 2022.
- Our 2021 and 2022 earnings forecast are below the consensus. However, we believed that consensus has not fully adjusted their earnings forecast for Indonesia’s US$55 per MT export levies which could absorb high palm oil prices in Bumitama Agri’s realised ASP next year.
- All in, Bumitama Agri valuation is undemanding. It is trading at FY21 price-to-earnings (PE) of 12.5x, rebounding from -1SD (standard deviation) of its five year multiple recently. We believe that Bumitama Agri deserves to trade at a premium relative to its Indonesian and Malaysian peers due to its stellar performance so far.
- Bumitama Agri consistently maintains its nucleus CPO yield at above 4.0MT per hectare which is positive for its profitability. This allows it to weather worse than expected CPOs price swing, or lower than expected external fruit purchases which may affect Bumitama Agri’s extraction rate and profitability.
Strong palm oil prices to support earnings
- CPO prices will be the key earnings driver for Bumitama Agri next year. We forecast Bumitama Agri’s CPO sales volume to grow by 6% y-o-y. We expect palm oil prices to reach US$617 per MT in 2021 (+4% y-o-y), before improving slightly to US$622 per MT in 2022.
- With structurally tight CPO price and supply in play, amid Indonesia ageing trees, poor fertiliser application and struggling state-owned enterprise (SOE) CPO planters, low CPO prices in the past three years have disrupted Indonesia’s nationwide replanting program and forced planters to reduce fertiliser application to cut cost.
- A tightening edible oil market is also positive for CPO prices to maintain its momentum despite current high prices. The risk of a short-term price reversal is unlikely due to good palm oil appetite from both China and India amid low palm oil stockpile in both countries. They are expected to keep importing at current prices.
- Indonesia’s B30 delivery in 9M20 almost hit our FY20 biodiesel blending target of 6.7m KL and achieve Indonesia’s national B30 blending target of 8.0m KL. This is despite the ongoing COVID-19 pandemic and transitional PSBB (large scale social distancing) still in place.
Maintain BUY with target price of S$0.66
- We rolled forward our discounted cash flow (DCF) valuation year to FY21. However, target price changes are immaterial as maintain our FY21/22 forecast and long term CPO price assumption of US$680 per MT from 2025F onward. We assume WACC and TG rate of 10.4% and 3% respectively.
- See Bumitama Agri Share Price; Bumitama Agri Target Price; Bumitama Agri Analyst Reports; Bumitama Agri Dividend History; Bumitama Agri Announcements; Bumitama Agri Latest News.
William Simadiputra
DBS Group Research
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Woon Bing Yong
DBS Research
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https://www.dbsvickers.com/
2020-11-10
SGX Stock
Analyst Report
0.660
SAME
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