• Maintain BUY, new P/E-based SGD0.80 Target Price from SGD0.69, 10% upside plus 3% FY20F yield.
• We believe Bumitama Agri will continue to see its share price rerate as CPO prices remain elevated. Its valuation remains attractive at 16x FY20 P/E, which is at a discount to its regional peer and SGX- listed peer averages.

We Expect Bumitama to Continue Benefiting From the Rise in CPO Prices

• We expect BUMITAMA AGRI (SGX:P8Z) to continue benefiting from the rise in CPO prices, given its purely upstream operations where every MYR100/tonne change in the CPO price will affect earnings by 8-10%. YTD-9MFY19, it has achieved an average CPO price of IDR6,514/kg.
• We expect the bulk of its earnings growth, at 61% y-o-y for FY20F, to come from our higher CPO price projection of IDR8,371/kg for that year, as well as higher FFB growth.

For FY19, FFB Growth Is Expected to be Flattish Y-o-y

• For FY19, FFB growth is expected to be flattish y-o-y, due to the dry weather at its estates during 3Q19. We understand the weather at Bumitama Agri's estates in Kalimantan has now normalised, after being dry for the bulk of 3Q19. Management has adjusted its guidance to a 45:55 ratio (from 43:57) for FFB output in 1H:2H.
• Our FFB growth assumption for FY19 is flat, while we continue to expect 10-15% growth for FY20-21, on 4,000 ha of new areas coming into maturity.
• In terms of unit costs, management is guiding for FY19 unit costs to rise 10% y-o-y in FY19, due to the flattish output projections. This implies that 4Q19 will see a q-o-q reduction in unit costs, likely due to lower remaining fertiliser application of 17% in 4Q19 vs 40% in 4Q18.
• We had already conservatively imputed a 10-15% increase for FY19, but are now reducing it to a 10% increase. For FY20-21, we have imputed a 5-10% y-o-y increase in unit costs, from higher minimum wages and fertiliser costs.

Management Has a Positive View on CPO Prices

• Management has a positive view on CPO prices, but has not set any targets for FY20 yet. Bumitama Agri does not engage in forward sales and, as such, should be able to capture the impact of the rising prices we are currently seeing.
• We make no changes to our earnings forecasts.

Maintain BUY

• We raise our target P/E to 18x (from 16x) FY20 to be in line with its mid-cap plantation peers as well as its Singapore-listed peers. Our Target Price rises to SGD0.80 (rounded up) from SGD0.69. Our target P/E of 16x 2020F is 2SD above its historical average.
• Our Target Price also implies an EV/ha of USD13,000 – at the mid-end of the peer range of USD10,000-15,000/ha. We believe earnings have turned the corner, with FFB output recovery being seen at its estates.

Source: RHB Invest Research - 9 Dec 2019