SINGAPORE (Dec 13): RHB is maintaining its "buy" on Bumitama Agri with 95 cents target price given its double-digit FFB growth and inexpensive valuations.
Bumitama is expected to post a strong FFB (Fresh Fruit Bunches) growth of 23% in FY17, on the back of a recovery from El Niño.
For FY18-19, RHB expects FFB growth to continue in the double-digits, at 16-18% y-o-y.
This comes on the back of 3,800ha of new land coming into maturity in 2018 and 6,700ha in 2019 from 14,500ha in 2017, as well as an increase of 15,000 ha in prime areas over the next four years.
Overall margins are also expected to improve, as more and more of the fruits processed are sourced from its nucleus estates.
Management estimates that gross profit margins (GPM) on FFB sourced from nucleus estates are about 50%, while GPM of plasma estates are at around 20%, followed by external fruits at 15%.
Currently, 50% of the fruits processed are from its nucleus plantations, while 23% is from plasma, and 27% from external sources.
While RHB expects CPO output to grow, the research house believes much of this has been reflected in CPO prices.
CPO prices fell from a high of MYR3,348/tonne ($1,109.54/tonne) in Feb to a low of MYR2,400/tonne this month.
For 2018, RHB expects CPO prices to stay relatively rangebound at MYR2,300-2,700/tonne.
Still, the research house is lifting its average price per tonne assumptions to MYR2,550 (from MYR2,400) and MYR2,700 (from MYR2,500) for 2018-2019 respectively.
"We expect CPO output growth in Malaysia and Indonesia to decline in 2018, from the estimated 12% and 21% y-o-y jump respectively in 2017.
With the seemingly delayed CPO production peak season in Malaysia, it is likely that part of the peak season will flow into 1Q18, which could result in Malaysia recording CPO output growth of 5-7% in 2018.
Indonesia, however, seems to have hit its peak already in Oct/Nov, which means the production cycle has normalised somewhat, resulting in CPO output growth of 3-5% for 2018.
As at 4.05pm, shares in Bumitama Agri are trading at 76 cents or 9.5 times FY18 recurring earnings.
