• Downgrade to NEUTRAL, with a lower Target Price of SGD0.38 from SGD0.85, 2.7% upside and 6% yield.
• After imputing our revised CPO price assumptions, we have cut our earnings for FY20-21F by 16-30%. Bumitama Agri (SGX:P8Z), being a pure planter, would suffer from the weaker CPO prices more than its peers who have downstream operations.

Our Worst Case Scenario for Demand Is Still a Possibility

• Our worst case scenario for demand is still a possibility, if COVID-19 is not halted until the year-end and crude oil prices do not recover in 2H20.
• Currently, at a palm oil and gasoil futures or POGO price gap of USD37/barrel, it results that the biodiesel demand in Indonesia could be short by 2.1m tonnes (instead of the 1.4m tonnes we had originally projected). This could mean that the worst case scenario is for a CPO stock/usage ratio to rise to 24.4% from 18.6% in 2019. Based on historical guidelines, this could imply that CPO prices could fall to between MYR2,000-2,200/tonne.

Our In-house Assumption Currently Is for COVID-19 to be Under Control Within 1H20

• Our in-house assumption currently is for COVID-19 to be under control within 1H20, which would mean our second scenario (Scenario2) is more probable. Scenario 2 assumes a 10% decline in demand from EU, the US and China as well as a 2.1m tonne decline in biodiesel demand in Indonesia, or a total 3.8m tonne decline in CPO demand. With this, we estimate an increase in CPO stock/usage ratio to 20.1% (from 18.6%).
• Based on historical data, CPO prices ranged between MYR2,200.00 and MYR2,400.00 per tonne, when stock/usage ratios were at this level in 2011 and 2018.
• As a result we are cutting our CPO price forecasts to MYR2,400/tonne for 2020 (from MYR2,600), while leaving intact our MYR2,500/tonne forecast for 2021 and 2022. We have also adjusted our FX assumptions to be in line with our latest in-house assumptions. With this reduction in prices, we have cut our earnings by 16-30% for FY20-21F.

Downgrade to NEUTRAL

• Downgrade to NEUTRAL with a lower SOP-based Target Price of SGD0.38 from SGD0.85, with a lower 2020F P/E target of 12x (from 18x).
• We lowered the target P/Es for the plantation companies to reflect the lower peer valuations, while our target P/E is at its 5-year historical mean.
• Our Target Price implies an EV/ha of USD10,000 which is at the mid-end of the peer range of USD5,000-15,000/ha.

Source: RHB Invest Research - 24 Mar 2020