Monday, September 16, 2013

Bumitama Agri : A Tree Worth Buying (UOBKH)

Bumitama Agri
Share Price S$1.00
Target Price S$1.23
A Tree Worth Buying

Re-iterate BUY with target price at S$1.23 on the back of its young age profile to support its production growth and as it continues to deliver one of the best OERs in the industry. On-time debt restructuring has helped to reduce exposure to Indonesia’s rate hike and lower the interest expense.

What’s New
• We re-iterate our BUY call on Bumitama Agri (BAL) with target price of S$1.23 based on 14x 2014F PE on the back of

– Young age profile to support growth. Strong production growth remains intact as 98% of its estates are located in Kalimantan, which are not affected by the recent dry weather in Sumatra and some areas in Kalimantan. BAL has about 75% of young and immature area that would support its strong double-digit production growth for at least the next five years.

– OER still among the best. BAL continues to deliver one of the highest oil extraction rates (OER) in the industry. This is attributable to good estate practices for harvesting and loose fruit collection.

– Prudent management team. Management has delivered their guidance or exceeded their projections since our coverage in May 12 (listed in Apr 12). This has built up confidence in the management team and also transparency.

• On-time debt restructuring reduces exposure to Indonesia’s rate hike. BAL has restructured most of its debt from rupiah-denominated to US dollar-denominated. Its US dollar-denominated loan accounts for about 84% of its total loan now vs 56.5% as at Dec 12. The loan restructuring also helps to reduce interest payment as US dollar loans are at lower interest rates (LIBOR/SIBOR + 2.00 to 2.15%) vs rupiahdenominated loans (10-11%). Based on sensitivity analysis, for every 200bp decrease in interest rate, its PBT would increase 3-4%.

• Low foreign currency exposure. As BAL mostly focuses on domestic sales, its exposure to foreign currency (US dollar and Singapore dollar) mainly comes from its financial assets and liabilities denominated in foreign currency. Operational cost exposure to forex comes mainly from fertiliser purchases. Based on the disclosure in its annual report, the costs denominated in foreign currencies for 2011 and 2012 were less than 10%. For every 5% appreciation in the US dollar against the rupiah, PBT is estimated to decrease 4-5%.

Stock Impact
• Strong FFB production. We expect FFB production to grow at a 3-year CAGR of 25% for 2013-15 on the back of 12,000-15,000ha of new mature area (15-20% of total mature area). Also, completion of the acquisition of Nabatindo Karya Utama (NKU) in Apr 13 would add about 3,374 ha, or 5% of total mature area, to BAL and contribute to its FFB production marginally by 1-2% in 2013. This has been factored into our earnings forecast. As we are entering the high production season, BAL’s FFB production growth could exceed our expectation. Based on our estimation, if FFB production growth for 2013 is 1% higher than our expectation, its net profit will increase 1% from our forecast of Rp823b.

• Sustainable earnings despite young age profile. Although BAL has the youngest age profile under our coverage, its earnings are sustainable unlike other young plantation companies that suffer from volatile earnings. This is mainly due to its strong FFB yield despite its young age and high OER arising from good estate management practice and operational efficiency.

• High OER despite increase in third-party crop. BAL’s OER remained high at 23.7% in 1H13, one of the highest in the industry, despite higher intake of third-party crops (+15.5% yoy). This indicates the good estate practice and efficiency of BAL as timing delivery of fruits to mill is crucial to ensure high OER. Also, BAL is getting good milling margin for external crop processing. For every 0.5% increase in OER, BAL’s 2013 net profit would increase 6% based on our assumption of 24%.

• Normalise cost of production in 2H13. Unit cost of production will be normlised in 2H13 as FFB production picks up during the peak production season. The high cost reported in 1H13 was mainly on increase in fertiliser dosage applied to larger mature areas and higher maintenance activities. Production cost in 2H13 is expected to be lower as 60% of fertiliser application was completed in 1H13 and lower transport cost as BAL takes delivery of two small barges to handle their production vs higher cost to engage third-party services.

• New planting on track to meet target. BAL has a new planting target of 13,000ha for 2013, including the 3,374ha additional planted area from the completion of the NKU acquisition. In 1H13, it planted about 5,549ha (vs 5,245ha in 1H12), on track to meet its planting target.

• IOI is increasing its stake in BAL. Since IPO, IOI has been acquiring BAL shares in the market. To date, it has purchased about 13.5m shares at prices of S$0.87-1.02 and increased its stake from 30.4% to 31.21%. This indicates the rising interest and confidence of IOI in BAL to continue to deliver strong production growth and earnings growth.

Earnings Revision/Risk
• No change to our earnings forecasts. We are expecting a net profit of Rp823b, Rp1,017b, and Rp1,084b for 2013, 2014 and 2015 respectively.

Valuation/Recommendation
• Maintain BUY and target price of S$1.23, based on 14x 2014F PE. We like BAL for its young age profile and best OER to support its 5-year net profit CAGR of 32%.

Share Price Catalyst
• Surge in CPO prices. BAL is highly leveraged to CPO prices. A surge in CPO prices would boost its earnings.

• M&A. Embarking on value-accretive acquisitions to expand its upstream operations.



Source/Extract/Excerpts/来源/转贴/摘录: UOBKH-Research,
Publish date: 13/09/13

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