• BUY, new target price of $0.95 with 24% upside plus 3% FY20F yield.
• Since BUMITAMA AGRI (SGX:P8Z) is a pure upstream producer, we believe it will be able to capitalise on higher CPO prices and deliver better earnings in 1H20. Its valuation remains attractive at 14x FY20 P/E, which is at a discount to its regional peers, as well as the averages of its SGX-listed peers.

CPO Prices Have Risen Sharply

• CPO prices have risen sharply to > MYR3,000/tonne. While we had expected an improvement in prices towards the year-end, the strength of the price rally caught us by surprise. We believe there could be a slight correction, as there could be some speculative elements at play. Nevertheless, we expect prices in 1H20 to remain high at MYR2,700-3,100/tonne, before seasonally weakening to a range of MYR2,400-2,700/tonne in 2H20.

We Increase Our CPO Price Forecasts

• Given this scenario, we increase our CPO price forecasts up to MYR2,600/tonne for 2020 while leaving our 2021 forecasts intact at MYR2,500/tonne. This will imply a substantial 22% y-o-y increase in CPO prices from 2019’s average of MYR2,129/tonne. With this, the plantation companies’ earnings are expected to re-rate upwards significantly, particularly as the leverage of CPO price change to earnings is much more significant than that of FFB output growth.
• For the firms under our coverage, every MYR100/tonne change in CPO prices impacts earnings by between 4% and 18% pa. We expect to start seeing the impact of strong CPO prices on earnings from the 4Q19 reporting period onwards, ie Feb 2020, which could trigger another round of share price retracement.
• Despite the run-up in share prices, we believe there is still upside for some stocks, as our sensitivity analysis indicates that most of our stock picks are still reflecting CPO prices of MYR2,400-2,500/tonne.

Remain Positive on the Sector’s Fundamentals

• We continue to remain positive on the sector’s fundamentals and believe there are three key factors that will keep CPO prices high in 2020:
  • A CPO deficit is imminent this year, as demand growth outstrips supply growth and stock/usage ratios fall below historical averages;
  • Biodiesel – the largest demand catalyst – is still very much a “GO” in Indonesia and Malaysia;
  • Food demand should remain strong from China and India.

BUY Call Maintained

• We maintain our call while target price rises based on an unchanged 16x FY20F P/E, or 1SD above its historical average.
• Our Target Price implies an EV/ha of USD13,000 – at the low 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 Bumitama Agri’s estates.

Source: RHB Invest Research - 20 Jan 2020