• Maintain BUY, with P/E-based SGD0.80 Target Price, 16% upside plus 2.9% FY20F yield.
• We believe BUMITAMA AGRI (SGX:P8Z) will continue to see its share price rerating as CPO prices remain at high levels. Its valuation remains attractive at 16x FY20 P/E, which is at a discount to its regional and SGX-listed peers.

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

• We expect Bumitama Agri to continue to benefit from the rise in CPO prices, given its purely upstream operations where every MYR100/tonne change in CPO price will affect its earnings by 8-10%.
• YTD-9MFY19, it has achieved an average CPO price of IDR6,514/kg. We project the bulk of its earnings growth of 61% y-o-y for FY20F to come from our higher CPO price projection of IDR8,371/kg for FY20, 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 experienced at its estates during 3Q19. We understand the weather at its 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 FY20F-21F, coming from 4,000ha of new areas coming into maturity.

Management Is Guiding for FY19 Unit Costs to Rise 10% Y-o-y in FY19

• 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, coming from higher minimum wages and fertiliser costs.
• Management has a positive view on CPO prices, but has not set any targets for FY20 as yet. The company does not do forward sales, and as such would 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 maintain our target P/E of 18x FY20, which is in line with its mid-cap plantation peers as well as its Singapore-listed peers. Our Target Price is unchanged at SGD0.80 (rounded).
• Our target P/E of 16x 2020F is 2SD above its historical average. Our Target Price 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 a corner, with FFB output recovery being seen at its estates.

Source: RHB Invest Research - 19 Dec 2019