UOBKH: Bumitama Agri – Hold Target Price $0.65

Glows In The Dark

We expect higher sales volume in 2H22 on higher production and sales normalisation as refiners are able to draw down more stocks in 3Q22. As of Jun 22, BAL’s inventory level was at 70% of its total capacity and we expect it to normalise by end-3Q22. CPO prices have recovered from the recent low with the temporary suspension on exports levy. Having said that, 2H22 earnings could come in lower hoh, mainly dragged by lower CPO and palm kernel ASPs hoh. Maintain HOLD with a target price of S$0.65.

WHAT’S NEW

• Higher utilisation rate for its milling operations. Despite the tough environment in 2Q22 in Indonesia with most plantation companies’ storage tanks being full, Bumitama Agri’s (BAL) mills utilisation rate remains high. This was mainly supported by:

a) Continuous purchase from third parties when others were cutting back. BAL’s mills utilisation rate remains healthy on the back of consistent third-party FFB purchase. In 2Q22, most millers cut back or stopped buying from third parties due to storage limitation, which did not happen to BAL thanks to its larger storage capacity.

b) Better-than-peers sales volume. BAL’s sales volume came in higher hoh as compared with its peers which came in lower hoh in 1H22. We reckon that this was mainly supported by its business model where BAL only sells its products domestically. On top of that, BAL has a long-term contract, where it had contracted about 80% of its total production for 2022 but the ASP is not fixed.

c) Mostly in CIF contracts. About 60% of BAL’s products are in cost, insurance and freight (CIF) contracts, which allows BAL to monitor the delivery timing and hence not be negatively affected by the frequent changes in export duty and levy. Buyers usually rely on the changes on export duty and levy to determine their delivery timing.

• Inventory to normalise in late-3Q22. As of Jun 22, the inventory level is at 70% of its total storage capacity (about two months) of production and it is expected to normalise in 3Q22 with higher sales volume and to normalise to about 50% of its total capacity.

• Increase in domestic CPO pricing. The Indonesian government had waived the export levy from 15 Jul to 31 Aug 22 to ease supply glut. This would bring up the domestic CPO prices, where Indonesia domestic CPO prices had increased 40% ytd before the removal of the export levy.

STOCK IMPACT

• We expect lower 2H22 earnings mainly due to lower CPO ASP, as domestic CPO prices have dropped by about 20% since Jun 22 due to the high inventory in Indonesia. Despite the domestic CPO prices increasing over the past one month, we expect international CPO prices in 2H22 to still be in a downtrend and hence we reckon that 2H22 CPO ASP for BAL would still be lower hoh. Having said that, we expect the lower CPO ASP to be partially offset by the stronger sales volume in 2H22 and result in lower margin.

• Higher FFB production guidance for 2022. BAL had raised its FFB production guidance from 5-10% yoy for 2022 to 16-18% yoy on the back of higher FFB yield. Having said that, we remain conservative on a 13% yoy FFB production growth where we expect 4Q22 production to come in lower than expected.

• Secured its full-year fertiliser requirement since early this year. BAL has managed to secure almost all the fertiliser required for 2022 early in the year as compared with its peers. The fertiliser cost is expected to increase by about 60-80% yoy. The cost of production for 2022 is expected to increase by 20-25% yoy. For fertiliser application, it’s still within BAL’s target with 50% applied as of 1H22.

EARNINGS REVISION/RISK

• Revised our 2022 earnings forecast. We had revised up our earnings forecast for 2022 by 44%, factoring in higher mill utilisation rate and hence higher third-party FFB purchase. We had also adjusted our net CPO ASP slightly higher by 10%, reflecting lower export duty and levy and hence better domestic CPO pricing.

• We maintain 2023-24 earnings at Rp2,076b and Rp2,209b respectively.