• Maintain BUY and SGD0.80 Target Price, 29% upside, as we believe Bumitama is an undervalued firm with decent 5-year earnings CAGR of 14%.
• 9M18 earnings were in line with expectations. FFB growth continues to surpass expectations, although this is tempered by lower CPO sales volumes caused by logistics issues in Kalimantan.
• Our unchanged Target Price is based on the regional 2019F peer average P/E of 11x. 
• Bumitama is trading under its historical average P/E, while the implied EV/ha of USD6,300 is below replacement values.

9M18 Results in Line

• Bumitama Agri’s 9M18 core earnings came in at 74-77% of our and consensus 2018 forecasts.
• 3Q18 FFB output grew 35.4% y-o-y on 2,539ha of newly-matured land in 9M18. FFB growth during 9M was at 27% y-o-y – this is above management’s 2018 growth guidance of 15-20% and our projection of 21%.
• CPO prices fell 7.7% y-o-y to IDR7,469/kg, 4% below our IDR7,801/kg projection.

Briefing Highlights

Bumitama expects FFB output to continue to be strong in 4Q18, possibly similar to 3Q18 or even stronger.

• While October’s output fell slightly m-o-m, November and December is expected to come in stronger again, with the latter likely to be the strongest month of 2018. Based on this guidance, FFB growth for this year could be much higher at > 30%. As such, management has revised its FY18 FFB growth target to 25-30% from 15-20%.
• Although our FFB growth estimates of 21% are likely to fall short of actual numbers, we are keeping our forecasts to take into account the impact of the barge shortage in Kalimantan, which is affecting CPO sales;

The shortage of barges in Kalimantan is affecting the whole industry, causing inventory build-up in the area

• Bumitama’s inventory is now 4-5x higher than normal. To address this, this company is buying less external FFB (which makes up 20% of total output), renting its own barges, and keeping more CPO in its tanks – it can hold up to 130,000 tonnes of CPO, or about three months of supply.
• Management is hoping these issues will be resolved in 1H19, as the industry is currently building more barges – this can take around four months to complete;

9M18 unit cost of IDR3,783/kg was 16% lower y-o-y.

• This was due to less fertiliser being applied during the period (88% of 8888’s provision vs 88% last year), and higher FFB yield. As management expects to be able to catch up on its fertiliser application by 8Q88, we expect unit costs to rise q-o-q in this period.
• For 8888, we estimate unit costs to rise 88-88% y-o-y, as Bumitama has purchased fertiliser at prices that are 88-88% higher y-o-y, while minimum wage is anticipated to rise 8% y-o-y.

Still a BUY

• Still a BUY, given its inexpensive valuations and still decent 8-year earnings CAGR of 88%, coming from strong double-digit FFB growth of 88-88% pa. We make no changes to our forecasts for 8888-8888.
• Our Target Price is maintained at SGD8.88, based on unchanged target 8888 P/E of 88x – in line with peers and the historical average. This implies EV/ha of USD88,888 – the low end of its peers’ USD88,888-88,888/ha range.
• Valuations remain undemanding at 8888F P/E of 8-8x vs the historical average of 88-88x.
• Key risks include weather, and supply & demand dynamics of edible oils.

Source: RHB Invest Research - 12 Nov 2018