Here’s why investors shouldn’t quit on Bumitama Agri just yet

CPO prices are expected to spike.

Investors should start readying their pockets, as analysts predict a strong comeback for beleaguered Bumitama Agri.

According to a report by DBS, hikes in crude palm oil (CPO) price forecasts should more than offset expectations of stronger Rupiah to drive 20% earnings before interest, tax, dividends and amortisation (EBITDA) compound annual growth rate (CAGR) over the next two years.

Further, CPO output forecast is anticipated to grow by a 10% CAGR over the next couple of years despite expectations of flat FBB yields this year. Over the years, Bumitama has instituted a strict water management system in a bid to limit water deficiency in severe dry conditions.

In addition, the drop in planting is not expected to impact Bumitama’s volume growth. Aggressive expansion has kept Bumitama’s tree-age profile younger relative to peers.

CBS also asserts that Bumitama’s balance sheet is robust enough to ride out the downcycle. Currently, its net gearing ratio is expected to settle at 59% by the end of FY15 and 56% at end-FY16 after accounting for one-off adjustment to equity on change in biological asset accounting standard.

In addition, a stabilising Rupiah should constrain Bumitama’s Sukuk balance, though DBS notes that the agribusiness company should still book forex translation losses in FY15, reversing into forex translation gain in FY16.

Estimates also place Bumitama’s borrowing costs to remain lower compared to its peers.