Strong productivity to drive firm profitability outlook
- We raise FY23F earnings by 38% as 9M23 earnings have already surpassed our previous estimate
- We maintain our FY24F/FY25F earnings forecast at Rp2tr per annum
- BAL’s superb profitability performance set to sustain
- Maintain BUY with unchanged TP of S$0.90
Well-run upstream CPO company.
BAL is a well-run palm oil company since it consistently churns strong CPO yield, profitability, and ROE performances even during the palm oil price downcycle, thanks to its good estate management. Moving forward, we believe it will reap the benefits of the higher palm oil price trend ahead with a double-digit earnings recovery outlook in 2024. We revised up our FY23F / FY 24F earnings by 38%/ 11%, respectively, to Rp2.2tr (-43% y-o-y) and Rp2.2tr (+18% y-o-y), mainly to account for our new CPO price assumption.
If the improving earnings trend holds in 2024, we think BAL’s share price will perform even better going forward, coupled with the current undemanding valuation at FY24F PE of 5.4x, a 30%-40% discount vs. its older plantation companies’ peers. Beyond 2024, given its prime age palm oil trees production cycle which will keep the overall cash cost low and CPO yield per hectare high, BAL will sustain its strong financial and return on equity achievement.
Global palm oil price recovery in 2024 will be supported by improving sunflower oil price and decent soybean oil premium to palm oil price outlook, which we believe will remain in good balance due to stable supply and demand outlook of edible oils and improving soymeal demand on China reopening. Meanwhile, we believe the palm oil price downside risk from current level is limited on improving crude oil price trend, as well as recovering demand from China.
In the longer term, we estimate BAL will generate steady annual dividend – at least S$0.02/share – assuming a CPO price benchmark of at least at US$900 per MT (Rp10,100/kg for domestic selling price). We think Indonesia’s CPO price benchmark can sustain around Rp10,000/kg (US$689 per MT) ahead, driven by Indonesia’s biodiesel consumption, which will help offset any weakness from overseas CPO demand. We believe our selling price assumption is conservative since it is at a discount to our palm oil benchmark price assumption of US$976/MT (Rp14,600/kg) since BAL is exposed to Indonesia’s domestic CPO prices, where the pricing mechanism is net of export levies and taxes.