Bumitama Agri - Our Upstream Pick

Drop in planting not impacting volume growth. Aggressive expansion in FY05-FY13 has kept Bumitama’s (BAL) tree-age profile younger (5.5 years) relative to peers. This is forecast to deliver 14% CAGR in FFB output (including smallholder estates) over the next 3 years. BAL’s operations are also efficient with gross profit/ha of c. US$1,750, to support 20% earnings CAGR in FY14-17F (second highest in our universe).

Prepared for El Nino. The majority of BAL’s estates are located in Central Kalimantan, where rainfall patterns have been normal, unlike Sabah and North Sumatra. Furthermore, over the years, BAL has instituted a stringent water management system in an effort to minimise water deficiency during severe El Nino conditions.

Balance sheet can withstand downcycle. Net gearing ratio is forecast to settle at 63% by the end of this year and 55% next. The weaker Rupiah should swell BAL’s Sukuk balance (swapped to USD), but this would be offset by rising output, higher ASP and lower fertiliser costs, while borrowing costs continue to remain lower-than-peers.

We peg BAL’s TP at S$1.26/share, based on DCF valuation (WACC: 13.2%, Rf: 8.8%, Rm: 15.7%, beta: 1.0, TG: 3%). This implies FY16F PE of 14.3x. Given 3-year earnings CAGR of 20%, the counter’s FY16F PEG ratio is only 0.72x, which we believe undervalues BAL compared to its growth outlook.

Technical Analysis
Daily Chart

Where we may go wrong
Our earnings expectations and valuation are based on several key assumptions. Any setback in FFB yields (due to severe weather) or expansion (i.e. lower than 3k ha p.a.) would adversely impact our valuation. BAL’s share price is also linearly driven by CPO price expectations and partly by Rupiah movements. A drop in CPO prices may drag the share price lower than our fair value, and vice versa. (Read Report)

Source : DBS Group Research

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