DBS Group Research analyst William Simadiputra has kept his “buy” call on Bumitama Agri P8Z (BAL) as it is one of the few palm oil companies that is poised to benefit from a tight crude palm oil (CPO) supply outlook on the back of a limited expansion and rejuvenation in palm oil estates in Indonesia.
“BAL has exposure to Indonesia’s domestic CPO price trend, which is poised to recover in 2H2023 on recoverin demand and [in] 2024 on limited supply outlook driven by El Nino,” says Simadiputra, who also kept his target price unchanged at 90 cents. BAL’s well-run palm oil estates are expected to be minimally impacted by the weather, he adds.
In FY2023 ended Dec 31, 2023, the analyst forecasts an average selling price (ASP) of IDR10,584 (91 cents) per kg and earnings of IDR1.6 trillion, which is down by 43% y-o-y but 38% higher than his previous estimate.
In FY2024, Simadiputra believes that the ASP will be at IDR10,146 per kg with BAL reporting earnings of IDR2 trillion, 28% higher y-o-y, also 38% higher than his previous estimates.
The analyst’s higher estimates for the FY2023 and FY2024 is mainly to account for his new CPO price assumption. His raised estimates for FY2023 also came after BAL’s 9MFY2023 results already surpassed his previous forecast.
“Despite earnings retreating from FY2022’s record high, we see BAL’s return on average equity (ROAE) remaining in the double-digits. We believe BAL will perform well despite El Nino hindering significant production volume growth in FY2023 and FY2024,” he writes.
He adds that the higher palm oil prices will drive BAL’s share price amid the flat production volume in FY2023 to FY2024.
“BAL’s earnings and share price requires palm oil price to improve to raise its NPAT/kg. We think BAL will churn out NPAT/kg of IDR1,400/kg in 2023, improving to IDR1,800/kg in 2024. We believe BAL’s capability to manage operational costs and high productivity estates will enable it to capitalize on lower operating costs – mainly fertilizers,” he continues.
At its share price of 60 cents as at Simadiputra’s report as at Jan 4, BAL is trading at a 50% discount versus upstream peers despite its superior operational and financial metrics, which is “unjustified”.
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“Our target price implies an FY2024 P/E of 8.1x, +2 standard deviation (s.d.) of its five-year average P/E multiple, which is in line with Singapore listed palm oil companies average FY2024 P/E multiple of 7.7 times,” he says. “Earnings recovery from 1H2FY203’s low stands as a re-rating catalyst.”
As at 3.33pm, shares in BAL are trading 1 cent higher or 1.67% up at 61 cents.
