May 15, 2019

Bumitama Agri (BAL) reported core net profit of Rp26b (-88.2% qoq, – 87.5% yoy) after excluding a forex gain of Rp84.2b. Results were below expectation due to higher selling expenses and financing cost. Selling expenses increased 1.0% qoq and 84.1% yoy in 1Q19. The unexpectedly higher selling expense was attributed to: a) additional barges were rented to expedite loading and delivery of palm products to support higher sales volume, and b) higher fertiliser application (higher cost due to depreciation of rupiah and higher fertiliser volume applied). Higher interest expenses, which increased by 5.0% qoq and 22.8% yoy, were mainly attributed to the higher interest rate as a result of higher LIBOR.

FFB production from nucleus areas up 2.0% yoy, while total FFB processes up by 4.0% mainly came from higher FFB production from plasma areas (+6.4% yoy) and third party purchases (+5.7%). 1Q19 nucleus FFB was contributing about 18.5% of our full year expectation (2.6m tons or +11% yoy).

Management maintains its guidance for FFB production growth of up to 15% yoy for 2019 vs our expectation of +11% yoy. Our conservative forecast is based on a higher base in 2018 with an increment of 28% yoy and fewer new mature areas. We reckon that BAL should be able to meet our production expectation, as it will be entering a higher production cycle in 2H19. Management had also guided that FFB production for 2019 may come in at 42% in 1H19 and 58% in 2H19. The unexpectedly high selling expenses can be mainly attributed to additional barges rented. Recall in 3Q18, Kalimantan players were affected by the logistics bottleneck due to insufficient vessels to transport CPO to buyers. BAL rented additional barges with a fixed contract period (eg 6-12 months’ contract) to facilitate the logistics issue. We expect the selling expenses to be normalised in 2Q19, given that most of the contracts will come to an end.

Management intends to increase the processing capacity of mills, infrastructure as well as set up a tissue culture research and development centre in Central Kalimantan. Management targets to plant 2,000ha of new areas in 2019. For 1Q19, BAL only planted about 29ha. New planting for the upcoming years are expected to be slow as the cost of planting is rising and the returns for investment are not attractive as new planting is moving into less fertile land.

We forecast EPS of Rp718, Rp893 and Rp951 for 2019-21 respectively. We factor in FFB production growth of 11% yoy and blended net ASP of Rp7,100/kg for 2019 (based on our CPO price assumption of RM2,350/tonne net of taxes and at a discount to Dumai prices). Maintain BUY and target price of S$0.81 – UOB KayHian

Bumitama Agri closed at: S$0.70