Monday, February 10, 2014

Bumitama Agri - FFB Production Growth To Be Better This Year (UOBKH)

Bumitama Agri (BAL SP)
Share Price S$0.915
Target Price S$1.40
FFB Production Growth To Be Better This Year

BAL's 2013 results are likely to be within expectation. Its FFB production for 2013 grew 16.5% yoy, much weaker than 2012’s 39.8% yoy, mainly due to low FFB yield, which was affected by the dry weather back in 2011. However, we expect better FFB production growth in 2014 on recovery of FFB yield, young age profile and newly mature areas. OER remained high at 23.3% in 2013, one of the highest in the industry despite high third-party crop intake. Maintain BUY. Target price: S$1.40.


WHAT’S NEW
 2013 results to be in line with expectation. Bumitama Agri (BAL) is scheduled to release its results on 28 Feb 14 before market opens for trading. BAL’s 2013 net profit is likely to be about Rp729b (-2.1% yoy) mainly due to lower CPO ASP (9M13: Rp6,803/kg vs 2012: Rp7,193/kg).

  One of the highest FFB growth. BAL reported 16.5% yoy growth in nucleus FFB production for 2013. Although this was lower than 2012’s and its first guidance of 25%, it is one of the highest in the industry for 2013 when most plantation companies only reported low single-digit growth. This is due to BAL’s young age profile and the addition of 10% of new mature areas in 2013. The Indonesian FFB production for 2013 was lower and caught market by surprise; this was due to the lagged impact from dry weather back in 2011 and delay in fruit formation.

 Strong growth to resume in 2014. Going into 2014, we expect better performance from BAL, riding on FFB yield recovery, the addition of 13-18% new mature areas and recovery in CPO price. Cost hike pressure is likely to be milder compared with 2013 as the wage hike in 2014 is expected to be lower at 11-30% vs 2013’s 17-44% and with softer fertiliser prices. Being a pure upstream player, BAL’s bottom-line is very sensitive to changes in CPO prices. For every 10% increase in CPO price, BAL’s 2014 net profit will rise by 13%.

STOCK IMPACT
 2013 FFB production in line with expectation. BAL reported FFB production of 948,603 tonnes (+16.5% yoy) and CPO production of 462,291 tonnes (+13.1% yoy). This is in line with our expectation (we adjusted down the forecast post 3Q13 results to factor in the weather impact). The FFB production growth is weaker than previous year's 39.8% as it was affected by the dry weather back in 2011 in Central Kalimantan where the bulk of BAL's estates is located. For 2014, we expect its FFB production to recover and project about 30.2% FFB production growth on FFB recovery, more areas entering into prime production age and new mature areas

STOCK IMPACT
 4Q13 FFB production remained strong. BAL's 4Q13 nucleus FFB production was up by 13.7% yoy and 36.6% qoq. Despite entering into low production season, its FFB production still grew strongly qoq likely due to the delay in fruit formation and support from its young age profile. On the other hand, its 4Q13 CPO production growth of 7.7% yoy (+26.0% qoq) was much lower than its FFB production growth mainly due to flat FFB production from plasma area (+36.1% qoq).

 Maintaining high OER despite more third-party fruits. Despite higher intake of external crop in 2013 of 628,624 tonnes (+26.9% yoy), BAL's oil extraction rate (OER) remained higher at 23.3%, one of the highest in the industry. This indicates the good estate practice and efficiency of BAL as timing delivery of fruits to mill is crucial to ensure high OER. The marginal decline in OER from 2012's 23.8% was mainly due to the higher intake of external crop to maximise the mill utilisation rate and better milling margin from milling FFB. However, BAL's OER for its own crop remained high as evidenced in its 4Q13 production whereby its OER increased to 23.2% from 22.6% in 3Q13 as its thirdparty crop intake reduced by 5.1% qoq (+18.4% yoy).

 Milder hike in cost of production. Although we expect cost of production to be higher in 2014, jump in cost of production is likely to be milder than 2013. This is mainly due to milder hike in minimum wage in the region. Wage hike will be about 11-30% vs 2013's 17- 44% for the region. Among the region, West Kalimantan has the higher minimum wage increase of 30% as the minimum wage was lower compared to the other regions. 80% of Bumitama’s labour cost comes from Central Kalimantan (most of the mature areas), 17% from West Kalimantan (new planting areas) and 3% from the rest.

 On track to meet new planting target. We believe that BAL would be on track to meet its new planting target of 15,000ha (revised from 13,000ha including any new acquisition for 2013). In 9M13, it planted about 8,974ha, which brought the total additional area to 12,201ha, including the newly-acquired plantation. 2014 guidance is expected to be given during the analyst briefing on 28 Feb 14, however we are expecting a lower new planting target.

 Kick-start of RSPO certification process. BAL has started the Roundtable of Sustainable Palm Oil certification process. For a start, two mills and approximately 20,000ha of planted areas are put up for certification. This is a positive move as more buyers require a sustainable source.

EARNINGS REVISION/RISK
 No change in earnings forecast.

VALUATION/RECOMMENDATION
 Maintain BUY and target price of S$1.40, based on 15x 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.



Source/Extract/Excerpts/来源/转贴/摘录: UOBKH-Research,
Publish date: 04/02/14

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