• Net profit grew 13% q-o-q, but fell 68% y-o-y to Rp125bn, affected by lower CPO selling prices, below expectation.
• Expect 2H19 output to be stronger and help earnings.
• Bumitama Agri’s share price valuation has de-rated sufficiently…
• Prompt us to maintain our BUY, but with lower Target Price of S$0.69.

Earnings Improved Q-o-q But Fell Y-o-y; Below Expectation

• BUMITAMA AGRI LTD. (SGX:P8Z) reported net profit of Rp125bn (-68% y-o-y, +13% q-o-q). The drop in earnings y-o-y was due to lower CPO prices, while q-o-q improvement was mainly driven by higher output.
• We revised down our FY19F earnings by 20% to account for 1H19 earnings weakness and higher cash cost per kg, and FY20F earnings by 14% to factor in our lower margin assumption.

Where We Differ: CPO Price and 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 the liquidity discount placed on the counter is excessive. Stronger output in the second half of the year should help to provide a buffer to earnings this year.

What's New - Low Selling Prices Hit Earnings Performance

2Q19: Improved q-o-q but not good enough, in our view.

• Bumitama Agri reported net earnings of Rp125bn (-68% y-o-y, 13% q-o-q). The drop in earnings y-o-y was due to lower CPO price and higher than expected cash cost of Rp4,776 per kg in 2Q19 as production did not rebound by much in 2Q19. The earnings improvement q-o-q was in line with the higher output amid flat CPO prices q-o-q.
• Top line performance reached Rp1.8tr (-24.3% y-o-y, +6.1% q-o-q), on track with our estimate. CPO and PK sales volume reached 244.1k MT (-9% y-o-y, +8.7% q-o-q) and 51.2k MT (+12.4% y-o-y, -5.5% q-o-q), largely in line with 2Q19 CPO and PK production of 246.3k MT (-11.5% y-o-y, +9.7% q-o-q) and 50.9k MT (-11.3% y-o-y, +13.3% q-o-q) respectively. Output fell y-o-y, but still well on track to meet our forecast due to the high base effect last year.
• Realised CPO and PK ASP reached Rp6,582 per kg (-15.5% y-o-y, +0.4% q-o-q) and Rp3,355 per kg (-38.8% y-o-y, - 17.8% q-o-q) respectively, in line with global CPO price trend, which hovered around US$460-490 per MT during the quarter.

Earnings Revisions: Factoring 1H19 Weakness Into Our Forecast

• We revised down our FY19F earnings by 20% to Rp554bn (- 49.5% y-o-y) to reflect 1H19 earnings weakness which mainly came from the higher than expected cash cost performance amid the soft production trend. We made a 10% change to our FY20F earnings, on expectations that Bumitama Agri can maximise its profitability as CPO price recovers to US$543 per MT next year, hence we expect earnings to rebound 21% from the low base this year, to Rp670bn.
• FY20 earnings forecasts also included a lower interest income assumption on lower time deposit interest rate. Our earnings forecast is lower than consensus, mainly driven by our low CPO price outlook of US$500 per MT and US$543 per MT in 2019 and 2020 respectively, and also our conservative margin assumption.

Rating and Target Price: Maintain BUY With Lower Target Price of S$0.69

• We maintain our BUY rating on Bumitama Agri with lower DCF-based Target Price of S$0.69 per share after minor earnings revisions.
• We are sticking to our FY19F capex of Rp1tr despite lower guidance of Rp800bn-900bn post 2Q19 result briefing. Our target price should be achievable if Bumitama Agri’s earnings improve, led by our expectation of a CPO price recovery, and managing its operating expenses mainly fertiliser costs.
• In addition, Bumitama Agri’s valuation is undemanding, and trading volume is thinner than peers, but we believe the discount on this is too deep considering its earnings trend which has shown that it can withstand the current low CPO price as seen in 1H19 results.
• Our Target Price implies 18.5x FY20F PE, which is still around +1 standard deviation of its 5-year average PE multiple. We are also mindful that Bumitama Agri’s share price has sufficiently de-rated from the beginning of the year.

Source: DBS Research - 15 Aug 2019