■ Underperformance was caused by 14% y-o-y drop in CPO ASP, associate losses, and 16% y-o-y lower FFB yield
■ FY15F/16F earnings cut by 14%/12% on lower CPO ASP assumptions (relative to spot) and slightly lower FFB yields
■ Maintain BUY for 36% upside to revised TP of S$1.17; expect strong 3Q15 output to compensate weak CPO ASP
2Q15 earnings below expectations
Bumitama Agri (BAL) reported 2Q15 net profit of Rp217.7bn (-26% y-o-y; +20% q-o-q) – below our expectations on annualised basis. This brought 1H15 earnings to Rp398.7bn – representing 33% of our initial expectations. The weaker-than-expected 2Q15 earnings was attributable to 14% y-o-y lower CPO ASP (-4% q-o-q), losses from associates, and margin dilution due to 88% y-o-y jump in external FFB processed to compensate for deceleration in own production.
Stronger output in 2H15
BAL produced 355kMT of own FFB (-5% y-o-y; +4% q-o-q) and 178k MT of CPO in 2Q15 (+15% y-o-y; +11% q-o-q), while smallholders FFB purchases rose 7% y-o-y (+15% q-o-q) to 170k MT. BAL booked FFB yield of 4.0 MT/ha for the quarter (vs. 3.9 MT/ha in 1Q15 and 4.8 MT/ha in 2Q14), while OER averaged 22.8% (declining slightly from 23.1% in 1Q15 given the jump in external FFB processed). However the group still guides FY15 FFB output growth of 20% - implying stronger 2H15 volumes.
FY15F/16F earnings adjusted by -14%/-12% - imputing lower ASP relative to spot
The group’s total borrowings declined 2% qo-q to Rp3,586bn at the end of Jun-15 (from Rp3,646bn at the end of Mar-15) on debt repayments, which brought cash down by 63% q-o-q to Rp506bn. This translated to debt to total equity ratio of 74.1%, up from 61.5% at the end of last quarter. We understand amendments to IAS 41 (biological assets accounting) from 1 Jan-16 would clip the group’s equity through one-off adjustments, but we understand resultant net gearing ratio should remain below debt covenant of the group’s Sukuk.
BUY call reiterated
After revisions, BAL’s DCF-based intrinsic value is now adjusted to S$1.17/share. This still offers 36% potential upside from current level. We expect CPO prices to recover next year on lower prospective soybean planted area, slower palm oil output growth, and ramp up of biodiesel offtake. We also expect 2H15 earnings to be boosted by lower fertiliser cost, as we understand the group had applied 70% of its FY requirement in 1H15. (Read Report)
Source : DBS Group Research