Bumitama Agri (BAL SP) - UOB Kay Hian 2016-11-16: Anticipating A Better 4Q16 And 2017

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BUMITAMA AGRI LTD. P8Z.SI

Bumitama Agri (BAL SP) - Anticipating A Better 4Q16 And 2017

• We remain positive on Bumitama Agri (BAL)’s outlook. Aside from having plantation assets with young age profiles, BAL saw a strong production recovery in 3Q16 on yield recovery from weather stress. Its recovery pace is faster than peers’ due to its strategic estate locations which are less affected by the drought. 
• We are expecting a stronger performance in 4Q16 on higher production and CPO sales volume as inventories are drawn down. 
• Maintain BUY. Target price: S$1.25.

WHAT’S NEW

• Post briefing, we are keeping our positive view on Bumitama Agri (BAL SP). We maintain our earnings forecasts for now.
• Key takeaways from briefing: 
  1. Expect stronger 4Q16 performance on higher CPO sales volume. There was an inventory build-up in 3Q16 where inventory increased to 18,500 tonnes from 7,000 tonnes as at end-2Q16. This was likely due to the timing of the deliveries. We believe inventory levels will normalise in 4Q16, while CPO sales volume is expected to increase and could translate to stronger earnings in 4Q16.
  2. Production continues to pick up in 4Q16. 3Q16 FFB production was 559,700 tonnes (+46.7% qoq, -0.6% yoy) and 1.4m tonnes (-11.5% yoy) for 9M16. We understand that production is likely to have peaked in Oct 16 and we might see a gradual decline in Nov-Dec 16 as BAL is entering the seasonally weak production period. FFB production in 4Q16 might come in marginally stronger qoq from 3Q16 onwards. Management is maintaining its FFB production guidance of -5% and at worst, -10% yoy for 2016. Meanwhile, management indicated that there is high potential of its registering a 5% yoy decline in production for 2016, which is in-line with our forecasted 4.4% yoy decrease in production.
  3. Cost of production might increase. Unit cost of production is expected to increase yoy for 2017. The increase in production costs will come mainly from: 
     1. the rise in minimum wage with the government having announced that minimum wages be increased by 8% effective Jan 17, and 
     2. an increase in fertiliser costs. 
     However, this will partly be offset by higher production, which will bring down per unit cost of production. Management will give a more details guidance during the 4Q16 briefing.
• For 9M16, cost of CPO production increased by 5.8% to Rp4,175/kg.

STOCK IMPACT

Deferred tax credit recognition. 

• BAL would report a deferred tax income arising from government incentives for the revaluation of assets in 4Q16. However, the quantum of the deferred tax income would not be substantial as management is targeting to adopt a conservative approach towards write-backs which will be recorded in the next to 5-10 years. Thus, effective tax rate could be lower in the upcoming years. 
• Effective tax rate was 18% and 23% for 2015 and 9M16 respectively.

More new planting in 2017. 

• New planting for 9M16 reached 1,298ha. In view of more stringent new planting procedures (NPP) under the Roundtable on Sustainable Palm Oil (RSPO), BAL has slowed down new planting activities in 2016 to ensure that it complies with all NPP requirements. 
• Management had recently received the approval from the RSPO for its new planting area target for 2017 which was submitted for assessment early this year. Thus, we expect better progress in new planting in 2017.

More new areas to come into maturity in 2017. 

• Management is expecting about 16,000 ha of new areas to come into maturity in 2016 and about 13,000 ha in 2017. This would increase FFB production in 2017. 
• We are expecting FFB production growth of 15.6% yoy for 2017 on the back of: 
  1. newly mature areas, 
  2. recovery of FFB yield and 
  3. young oil palm trees approaching their prime age. 
• Meanwhile, management will only give their production guidance for 2017 during their 4Q16 result briefing.

Good rainfall in Central Kalimantan. 

• Rainfall in Central Kalimantan has been good since 1H16. Trees were less stressed and FFB yield recovered from 2.5 tonnes/ha in 2Q16 to 3.7 tonnes/ha in 3Q16. We understand that there was more rainfall in Oct 16, but there is no flooding issue for now.

Positive contribution from biodiesel sales. 

• BAL secured biodiesel supply contracts from Pertamina to supply 20,078 kilolitres (kl) for Nov 15-Apr 16, and 23,188kl for MayOct 16. BAL has fully delivered the secured volume for May-Oct 16 with gross margin of about 10% (vs 5% in 2015) as production volume picked up. For Nov 16-Apr 17, allocations to BAL are lower at 18,084 kl. 
• We believe the lower volume secured was mainly due to the allocation volume now having to be shared between more biodiesel producers now. 
• All in all, this is positive to BAL’s downstream earnings. For 9M16, biodiesel segment contributes about 5% of total revenue.

EARNINGS REVISION/RISK

• We are now expecting net profits of Rp920.5b, Rp1,442.8b and Rp1,477.2b for 2016-18 respectively.

VALUATION/RECOMMENDATION

• Maintain BUY and target price of S$1.25, based on 15x 2017F PE.
• We like BAL for its young tree age profile, which spells strong production, as well as its hands-on estate management which has allowed BAL to consistently deliver a high oil extraction rate (OER).

SHARE PRICE CATALYST

• Surge in CPO prices. BAL is highly leveraged to CPO prices. A surge in CPO prices will boost its earnings. For every 10% increase in CPO prices from our base case, our EPS forecast would increase 22%.

Ooi Mong Huey UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-16

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250