Bumitama Agri - UOB Kay Hian 2022-08-18: 1H22 Results Above Expectations; Glows In The Dark


Bumitama Agri - 1H22 Results Above Expectations; Glows In The Dark

  • We expect higher sales volume in 2H22 on higher production and sales normalisation as refiners are able to draw down more stocks in 3Q22. As of Jun 22, Bumitama Agri’s inventory level was at 70% of its total capacity and we expect it to normalise by end-3Q22.
  • CPO prices have recovered from the recent low with the temporary suspension on exports levy. Having said that, Bumitama Agri's 2H22 earnings could come in lower h-o-h, mainly dragged by lower CPO and palm kernel ASPs h-o-h.
  • Maintain HOLD with a target price of S$0.65.

Bumitama Agri's 1H22 results above expectations.

  • Bumitama Agri (SGX:P8Z) reported a core net profit of Rp2,304b (+ >100% h-o-h & y-o-y) for 1H22, accounting for about 90% of our full-year assumption. This is above our and consensus expectations due to better-than-expected sales volume. Bumitama Agri's 1H22 earnings were mainly buoyed by strong selling prices which averaged Rp14,327/kg, 75% higher than 1H21 despite lower sales volume.
  • Outperformed its peers with higher 2Q22 q-o-q earnings. 2Q22 net profit increased by 50% q-o-q, mainly supported by strong sales volume (+24% q-o-q) and the strong production recovery in 2Q22. As compared to most of its Indonesia peers whose sales volumes were affected by the export limitation in 2Q22, Bumitama Agri’s sales were not affected as it only sells to the domestic market.
  • In addition, Bumitama Agri was still able to deliver CPO to its customers in 2Q22, thanks to its long-term relationship with customers as well as its customers’ larger storage capacity.
  • Strong production recovery in 2Q22. The total FFB production is still within our expectation, contributing 50% of our full-year forecast. 2Q22 production came in strongly with both FFB and CPO production increasing by ~30% q-o-q. The strong production recovery in 2Q22 had resulted in a superior quarterly achievement of 6.1tonne/ha, supported by favourable weather during the year, as well as a number of field continuous improvement initiatives, such as water management, mechanisation, bio-fertiliser application and the Accelerated Production Taskforce.

Higher utilisation rate for its milling operations.

  • Despite the tough environment in 2Q22 in Indonesia with most plantation companies’ storage tanks being full, Bumitama Agri’s mills utilisation rate remains high. This was mainly supported by:
    1. Continuous purchase from third parties when others were cutting back. Bumitama Agri’s mills utilisation rate remains healthy on the back of consistent third-party FFB purchase. In 2Q22, most millers cut back or stopped buying from third parties due to storage limitation, which did not happen to Bumitama Agri thanks to its larger storage capacity.
    2. Better-than-peers sales volume. Bumitama Agri’s sales volume came in higher h-o-h as compared with its peers which came in lower h-o-h in 1H22. We reckon that this was mainly supported by its business model where BAL only sells its products domestically. On top of that, Bumitama Agri has a long-term contract, where it had contracted about 80% of its total production for 2022 but the ASP is not fixed.
    3. Mostly in CIF contracts. About 60% of Bumitama Agri’s products are in cost, insurance and freight (CIF) contracts, which allows Bumitama Agri to monitor the delivery timing and hence not be negatively affected by the frequent changes in export duty and levy. Buyers usually rely on the changes on export duty and levy to determine their delivery timing.
  • Inventory to normalise in late-3Q22. As of Jun 22, the inventory level is at 70% of its total storage capacity (about two months) of production and it is expected to normalise in 3Q22 with higher sales volume and to normalise to about 50% of its total capacity.
  • Increase in domestic CPO pricing. The Indonesian government had waived the export levy from 15 Jul to 31 Aug 22 to ease supply glut. This would bring up the domestic CPO prices, where Indonesia domestic CPO prices had increased 40% year-to-date before the removal of the export levy.

We expect lower 2H22 earnings from Bumitama Agri

  • We expect lower 2H22 earnings mainly due to lower CPO ASP, as domestic CPO prices have dropped by about 20% since Jun 22 due to the high inventory in Indonesia. Despite the domestic CPO prices increasing over the past one month, we expect international CPO prices in 2H22 to still be in a downtrend and hence we reckon that 2H22 CPO ASP for Bumitama Agri would still be lower h-o-h.
  • Having said that, we expect the lower CPO ASP to be partially offset by the stronger sales volume in 2H22 and result in lower margin.
  • Higher FFB production guidance for 2022. Bumitama Agri had raised its FFB production guidance from 5-10% y-o-y for 2022 to 16-18% y-o-y on the back of higher FFB yield. Having said that, we remain conservative on a 13% y-o-y FFB production growth where we expect 4Q22 production to come in lower than expected.
  • Secured its full-year fertiliser requirement since early this year. Bumitama Agri has managed to secure almost all the fertiliser required for 2022 early in the year as compared with its peers. The fertiliser cost is expected to increase by about 60-80% y-o-y. The cost of production for 2022 is expected to increase by 20-25% y-o-y. For fertiliser application, it’s still within Bumitama Agri’s target with 50% applied as of 1H22.

Bumitama Agri - Earnings forecast revision and recommendation

Jacquelyn Yow Hui Li UOB Kay Hian Research | Leow Huey Chuen UOB Kay Hian | https://research.uobkayhian.com/ 2022-08-18
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.650 SAME 0.650