Brokers slash estimates for Bumitama after 1Q disappointment, but say production remains strong

SINGAPORE (May 17): DBS Vickers Securities and UOB Kay Hian are maintaining their “buy” recommendations on Bumitama Agri Limited (BAL) with the respective price targets of 69 cents and 81 cents, even as the palm oil producer missed both research houses’ expectations with its latest set of quarterly results.

RHB Research, on the other hand, remains “neutral” on the stock while lowering its P/E based target price to 62 cents from 67 cents previously to reflect a 9% downside.

To recap, BAL booked a net profit of Rp111 billion ($10.5 million) for the 1Q ended March, down 52% y-o-y due to lower realised average selling prices (ASP).

With that, DBS analyst William Simadiputra has lowered his FY19-20 earnings forecast by 29-30% to account for the recent crude palm oil (CPO) pricing discount to the benchmark ASP amid the low price environment, but makes no changes to his CPO output growth assumption of 6% y-o-y.

Simadiputra nonetheless remains positive on the group’s earnings prospects considering a higher milling capacity outlook; younger tree-age profile relative to the stock’s peers; and positive fresh fruit bunches (FFB) output of 8.6% CAGR between FY18-20F.

“We believe there is currently an excessive liquidity discount placed on the counter. Stronger output in the second half of the year should help to provide a buffer to earnings this year,” he adds.

Likewise, UOB analyst Leow Huey Chuen is expecting a better quarter ahead for BAL as selling expenses normalise in 2Q19, as most of the high-cost barges would have come to an end.

He also expects FFB production growth to pick up over the next three quarters to meet UOB’s production forecasts, as the group enters a higher production cycle in 2H19.

“We like BAL for its young tree age which spells strong production, as well as its hands-on estate management which has allowed BAL to consistently deliver high oil extraction rates (OER). BAL’s cash flow should improve with less dilution from new mature areas while mature trees are moving into the high production age (7 years and above),” comments Leow.

While RHB deems BAL as “somewhat better off than its peers” considering its strong double-digit FFB growth, the research house believes CPO prices will remain the key catalyst for the pure upstream player.

RHB’s lower target price comes post the earnings announcement and after rolling forward its valuation period to FY20, although the target P/E of 12 times remains unchanged, in line with BAL’s peers and within its historical average P/E band of 10-13 times.

“We cut our 2019 forecasts by 35% and lower our 2020-2021 forecasts by 8-15%, after taking into account lower PK price assumptions (reduced by 10-15% for 2019F-2020F) and higher selling expenses… Our TP implies EV/ha of USD10,000 – at the low end of its peers’ USD10,000-15,000/ha range,” notes the research house.

As at 3:34pm, shares in BAL are trading 1 cent lower at 69 cents or 1.75 times Dec-19F P/BV based on RHB estimates.