• BUMITAMA AGRI LTD. (SGX:P8Z)'s 1Q19 earnings below expectations, hit by low ASP.
• Volumes did not provide sufficient cushion in 1Q19.
• Expect earnings to grow alongside higher output in 2H19.
• Maintain BUY with lower Target Price of S$0.80 as we reduced our FY19-20F earnings by 29/30%.

Lower Than Expected ASP Hit 1Q19 Earnings

• BUMITAMA AGRI LTD. (SGX:P8Z) booked net profit of Rp111bn (-52% y-o-y, -47% q-o-q), below our and street expectations mainly on lower realised ASP. The ASP of CPO reached Rp6,555 per kg (-16.3% y-o-y, +8.1% q-o-q), due to the lower benchmark price trend in 1Q19.
• We have lowered our FY19/20 earnings forecast by 29%/30% to Rp784bn/Rp787bn, mainly to account for the pricing discount to benchmark ASP amid the low price environment but made no change to our CPO output growth assumption of 6% y-o-y albeit management is sticking to their guidance of double-digit y-o-y output growth.

Where We Differ: Besides CPO Price, Volume Expansion Will Underpin Earnings Growth

• Higher milling capacity outlook is positive for Bumitama Agri’s profitability. Moreover, we believe the aggressive expansion in FY05-13 has kept Bumitama Agri’s tree-age profile younger relative to peers, with positive FFB output of 8.6% CAGR (including smallholder estates) between FY18 and FY20F.

Potential Catalyst: Re-rating on Performance Delivery

• We believe there is currently an excessive liquidity discount placed on the counter. Stronger output in the second half of the year should help to provide a buffer to earnings this year

Key Risks to Our View

• CPO price. There would be downside risk to our CPO price forecast if 2019 output grows beyond our expectation. Stronger-than-expected yields across Indonesia and Malaysia may put pressure on CPO price trend in 2019 and 2020.

What's New - Earnings Cushion From Higher Output

1Q19 earnings: Below expectation

• Bumitama Agri booked Rp111bn (-50.4% y-o-y, -47% q-o-q), below our and street expectations mainly on lower realised ASP. 1Q19 reported earnings was also buffered by a foreign exchange gain of Rp84bn. Earnings were overall lower in 1Q19 due to lower ASP, while its cost profile was relatively fixed on a y-o-y basis.
• Topline reached Rp1.67tr (-12% y-o-y, -24% q-o-q) mainly on lower ASP. The ASP of CPO and PK reached Rp6,555 per kg (-16.3% y-o-y, +8.1% q-o-q) and Rp4,083 (-38.3% y-o-y, -6.2% q-o-q) respectively, due to the lower benchmark price trend in 1Q19. Sales volume performance was relatively soft in 1Q19, tracking the production performance. CPO and PK sales volume reached 224k MT (+9.1% y-o-y, flat q-o-q) and 50.2k MT (+12.4% y-o-y, flat q-o-q) respectively.
• Processed FFB reached 1m MT (+4% y-o-y, -11% y-o-y), which consists of 70% from internal fruits (nucleus plus plasma) at 482k MT (+2% y-o-y, -13% q-o-q) and 224k MT (+6% y-o-y, -12% q-o-q). Meanwhile, purchased external fruits reached 299k MT (+5.7% y-o-y, -8% q-o-q). Overall operational metrics such as CPO yield and extraction rate were relatively stable y-o-y at 4.2 MT per hectare and 22.4% respectively.

Earnings revision: Assuming lower ASP in our forecast as soft output was anticipated previously

• We cut our FY19 and FY20 earnings forecast by 29% and 30% to Rp784bn and Rp787bn respectively, to account for lower Indonesian domestic ASP in 1Q19. We penciled in a 20% discount to our benchmark price in 2019 from 12% previously as the current low CPO prices may pressurise Bumitama Agri’s ASP especially those that have a few concentrated buyers.
• We made no changes to our operational and cost assumptions at this juncture as overall production performance was in line with our forecast, as we expect softer production growth this year after a good performance last year. Management reiterated its guidance on production increase of up to 15% y-o-y this year, with a stronger production level in the second half of the year, considering that 2Q19 output will be pretty much flat q-o-q.
• Our overall earnings forecast is below consensus, mainly due to more conservative assumptions for upstream planters arising from the absence of strong catalysts on CPO prices and cost cutting measures, due to exposure to external fruit purchase which forms around half of the fruits processed including plasma estates fruits.

• We maintain our BUY rating with DCF-based fair value of S$0.80/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, β: 0.8, TG: 3%), offering 26% potential upside from the current level, mainly to account for the lower earnings forecasts in 2019 and 2020.
• Our Target Price implies 18x FY19F PE and EV/hectare of US$10,700 per hectare.
• Despite the weak earnings performance, we believe Bumitama Agri would be able to withstand the current low price environment due to its strong CPO yield of above 4 tons per hectare (FY18: 4.5 ton per hectare). We believe planters with yield above 3.5 tons per hectare will deliver positive earnings and maintain a sound balance sheet even if, at the worst case, prices stay at the 1Q19 low.
• Bumitama Agri’s share price has climbed 10% year to date and we believe the outperformance is largely because investors took the opportunity to buy quality CPO planters as valuations were attractive. We see some scope for Bumitama Agri’s share price to perform this year mainly on recovering earnings trend from stronger production in the second half of the year, despite weak CPO prices.

Source: DBS Research - 15 May 2019