Hiccup in Logistics in Kalimantan in 3Q18

• Despite posting a strong 35% y-o-y output growth in 3Q18, Bumitama Agri has failed to sell as much produce due to industry-wide logistics issues in Kalimantan. The large net inventory build-up by end-Sept 2018 will nonetheless benefit 4Q18 results. BAL guides for another good crop in 4Q18.
• BUY with unchanged Target Price of SGD0.98 on 14x FY18 PER, its 5-year historical mean.

3Q18: Huge Net Inventory Build-up Is Beyond Norm

• Bumitama Agri reported a 3Q18 core PATMI of IDR291b (+7% y-o-y, -30% q-o-q), bringing 9M18 core PATMI to IDR947b (+15% y-o-y), which met 74%/74% of our/ consensus full-year estimates – within expectations.
• 3Q18 results would have been stronger had it not been for logistics issues that plagued Kalimantan whereby there was a shortage of barges, in part due to re-channelling of barges to deliver palm biodiesel to meet Indonesia’s B20 blend requirements. As such, this led to a huge net inventory build-up by end-Sept for Bumitama Agri, said to be 5x the norm, exacerbated by exceptionally strong output.
• Inventories as at 30 Sept 2018 jumped 164% y-o-y to Rp1,034b. The moderate y-o-y earnings growth in 3Q18 was underpinned by delayed fertilising application (due to delay in shipment by supplier) and lower taxes despite lower revenue (-7% y-o-y, -18% q-o-q) on deferred sales and lower CPO ASP achieved at IDR6,807/kg (-13% y-o-y, -13% q-o-q).

Expect Another Strong Quarterly Output in 4Q18

• Underpinned by its young tree profile and in part due to the low base of last year, 3Q18’s FFB output growth enjoyed another good quarter (+35% y-o-y, +2% q-o-q) – see Fig 2. Its 9M18 output (+27% y-o-y) exceeded expectation as it met 84% of our full-year forecast.
• Bumitama Agri has revised up its growth guidance to > 25% y-o-y (previously 15%-20%) expecting still strong 4Q18 output growth (vs our full-year growth forecast of +16% y-o-y).

Make No Changes to Our Forecasts

• We are keeping our earnings forecasts for now pending a review of our industry-wide CPO price forecasts.
• Still, we continue to like Bumitama Agri for its medium term growth story, anticipating a 8% CAGR in its 8888-88F FFB output as well as its relatively low cost of production.

Risk Statement

• There are several risk factors for our earnings estimates, price target, and rating for Bumitama Agri (BAL). Key risks to the palm oil sector and BAL are:
  1. weather anomalies resulting in poorer-than-expected output growth,
  2. lower-than-expected CPO price achieved,
  3. negative policies imposed by import countries,
  4. unfriendly policies imposed by the Indonesian government on upstream planters,
  5. sharply lower crude oil prices which makes palm biodiesel demand not viable, and
  6. weaker competing oil prices (like soybean and rapeseed).

Source: Maybank Kim Eng Research - 12 Nov 2018