● Bumitama's 9M15 core profit (excl. forex losses) has been 67% of our FY15E, slightly below estimate due to the timing of sales although total CPO output was within expectation. We note a higher inventory trend as of Sep-15 similar across the CPO planters.
● We expect some catch-up of sales in 4Q. Management expects flat QoQ internal FFB production, leading them to guide down 2015 growth target from 20% to 15%. Due to the current prolonged dryness, management assesses 2016 production can be up to 5% behind a normal year's growth (of 15-20% YoY growth).
● For the accounting change treatment to biological asset, the company has opted for the historical method. The impact would be additional yearly depreciation (~Rp110 bn), and a one-off to equity of Rp1.6 tn. Net gearing is up to 0.6x but still manageable.
● We are more positive on CPO prices on El Nino catalyst and government's B20 programme in 2016. Bumitama is one of the direct beneficiaries of this programme as it recently secured 20,000 KL allocation to supply Pertamina. Maintain OUTPERFORM.
9M15 core profit slightly behind due to timing of sales
Bumitama's 9M15 core profit (excluding translational forex losses from USD debt) has been 67% of our FY15E, slightly below estimate due to the timing of sales, although total CPO output came within expectation. Management said the higher inventory was because of the timing of delivery, as some was delayed from end-September to October.
Nucleus production recovered in 3Q, up 15% YoY (8% QoQ), but still running behind our estimates. Management has revised down the internal FFB target from 20% to 15%. Some, however, was offset by external fruit purchases which was up 29% YoY (-10% QoQ).
Due to the prolonged dryness that impacted its region (July-October), management assesses there could be up to 5% YoY lower production growth compared to the normal 15-20% growth.
As for the accounting treatment changes on the biological asset gain/loss, management has opted to apply the historical costs method. Palm trees will be treated as a depreciable asset and will be charged based on their productive useful life. The impact will be an additional yearly depreciation charge estimated at Rp110 bn, derived from the biological asset historical costs divided by 25 years life of the trees. There will also be a one-off charge lowering the equity by Rp1.6 tn (and Rp289 bn deferred tax liabilities), reversing the accumulate biological gain/loss accounted in previous years. These calculations are based on management's estimates and are subject to audit.
On the biodiesel front, Bumitama's subsidiary, PT Energi Baharu Lestari, secured 20,000 KL allocation to supply Pertamina for the next six months which takes up all of the company's biodiesel refinery capacity. This is part of the B20 programme that the government is planning for 2016. Bumitama is a direct beneficiary of this. Higher biodiesel demand benefits all palm oil players as it lifts prices up.
Accounting for the lower 2015-16 production, and the accounting changes, we lower our Bumitama earnings estimates by 4-5% for FY15-16. Our target price is revised to S$0.94 (from S$1.00), based on 15x FY16E P/E. (Read Report)
1) Bumitama Agri - Imputing lower yields by DBS Group Research, published on 12 November 2015
2) Bumitama Agri - Weak results priced in by Maybank Kim Eng Research, published on 12 November 2015
3) Bumitama Agri - A BUY Despite Weak Results by RHB Research, published on 12 November 2015
Source : Credit Suisse Asia Pacific Equity Research