• Bumitama Agri BAL is likely to outperform peers in 2Q18 with a net profit of Rp360b-400b, better q-o-q and y-o-y on the back of stronger FFB production.
• Management has been putting in efforts to improve group FFB yield and BAL is starting to see a better FFB yield recovery and has sustained its high OER despite high third-party fruit intake.
• We adjust our 2018 net profit forecast upwards by 14% to factor in the higher FFB production growth. Maintain BUY with a higher target price of S$0.93.

WHAT’S NEW

2Q18 likely to be another quarter of outperformance. Bumitama Agri (BAL) targets to announce its 2Q18 results on 14 Aug 18 before the market opens. We are expecting BAL to report a 2Q18 net profit of Rp360b-400b (1Q18: Rp211b, 2Q17: Rp284b). The better earnings would be supported by record-high FFB production. BAL is likely to report record- high FFB production in 2Q18 on the back of a strong FFB yield recovery and new mature areas. But this would have been partly offset by weaker CPO prices. Average Dumai/Belawan CPO price has weakened to US$619/tonne in 2Q18 (-4.0% q-o-q, -8.4% y-o-y).

Active with yield improvement programme. Over the last 2-3 years, management has been putting in efforts to mitigate the impact from weather disruptions to improve FFB yields. These efforts have translated into better FFB yields. These efforts include:

1. Water management at key targeted areas (ie building more water catchment areas in preparation for dry days and to facilitate better drainage to mitigate flooding). As water is a key component to driving oil palm tree fruition, BAL has been putting in increased efforts to developing its water management system in the past few years. These efforts have started to bear fruit with 2Q18 FFB yield expected to jump q-o-q and y-o-y.
2. Breeding weevils. Other initiatives taken to raise productivity include the setting up of weevil hatcheries to increase pollination which will raise FFB yield. Bumitama Agri (BAL)’s share price has been lagging behind peers’ even though the company is expected to deliver net profit growth of 22% y-o-y for 2018 in contrast to peers who are likely to record negative earnings growth in 2018 as FFB production growth is not likely to offset the decline in CPO ASP. We also like BAL for its young tree-age profile which spells strong production which can offset a low CPO ASP, as well as its hands-on estate management which has allowed BAL to consistently deliver a high OER.

SHARE PRICE CATALYST

• Higher-than-expected FFB production.

Source: UOB Kay Hian Research - 16 Jul 2018