DBS Research Group analysts William Simadiputra and Woon Bing Yong see plantation stock Bumitama Agri as a potential bargain, arguing that a positive earnings outlook for the stock has yet to have been priced in by the market. They are maintaining their “buy” call on the counter with a $0.66 target price.
Bumitama saw 3Q2020 net earnings of Rp190 billion ($1.82 million), which represented a 0.7% y-o-y and a 6.5% q-o-q improvement. This figure outperformed the expectations of the analysts on the basis of stronger than expected sales volume and palm oil prices in line with consensus.
CPO sales volume rose 6.1% q-o-q to 237,200 metric tonnes while palm kernel sales volume fell 4.4% q-o-q to 48,900 metric tonnes. CPO and PK average selling price (ASP) reached Rp 7,922 and Rp3,995 respectively.
“CPO prices will be the key earnings driver for BAL next year. We forecast BAL’s CPO sales volume to grow by 6% y-o-y. We expect palm oil prices to reach US$617 ($833.05) per metric tonne in 2021 (+4% y-o-y), before improving slightly to US$622 per metric tonne in 2022,” say the pair.
The analysts believe that Bumitama has room to improve on its earnings amid current high palm oil prices. They anticipate a strong 4Q2020 finish for the counter that will set up continued earnings growth recovery in 2021. Earnings are seen to grow 4.4% to Rp763 billion before growing further by 8.9% y-o-y to Rp832 billion in 2022.
Even so, valuations are undemanding, with the counter trading at FY21 price-to-earnings (P/E) ratio of 12.5, rebounding from -1SD of its five year multiple. “We believe that BAL deserves to trade at a premium relative to its Indonesian and Malaysian peers due to its stellar performance so far,” write the DBS duo.
While strong liquidity has no doubt pushed up equity prices, the analysts believe that Bumitama’s fundamentals are strong. Its estates are well-managed, they say, with low nucleus CPO cash cost level at around Rp5000 per kg.
The company also maintains nucleus CPO yield at above 4 metric tonnes per hectare, which boosts profitability. It also acts as a useful hedge against CPO price underperformance or lower than expected external fruit purchase, which could hurt Bumitama’s extraction rate and profitability.
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In the wider palm oil market, CPO prices and supply are structurally tight due to ageing trees in Indonesia, poor fertiliser application and inefficient state-owned enterprise CPO planters. Low CPO prices over the past three years have also affected Indonesia’s nationwide replanting programme while forcing planters to cut fertiliser application to reduce costs. Prices could therefore move back upwards due to reduced supply.
“A tightening edible oil market is also positive for CPO prices to maintain its momentum despite current high prices. The risk of a short-term price reversal is unlikely due to good palm oil appetite from both China and India amid low palm oil stockpile in both countries. They are expected to keep importing at current prices,” comment the analysts.
Indonesia’s B30 biodiesel programme - which relies on palm oil - has also delivered strongly in 9M2020. It almost hit the analysts’ biodiesel blending target of 6.7 million kilolitres and Indonesia’s national B30 blending target of 8 million kilolitres. This was in spite of the ongoing Covid-19 pandemic Indonesia and the persistence of large-scale social distancing.
“We believe that any major announcements of a COVID-19 vaccine and current CPO prices may provide more headroom for BAL’s share price to perform,” note Simadiputra and Woon. But downside risks to CPO prices from stronger-than-expected pressure from soybean prices, or stronger than expected CPO output in Indonesia and Malaysia in 2021 could potentially put earnings at risk.
The analysts consider Bumitama one of their top "buys" in the palm oil universe due to its consistent CPO yield, which supports its profitability. "We believe that it is one of the best proxies for recovery of CPO prices in the market," they comment.
As of close of market, Bumitama Agri is trading at $0.52 with a P/E ratio of 10.52. Dividend yield for the counter is 1.75%.
