Will Bumitama Agri finally see recovery in 2016?

Share price is still down 7.5% YoY.

Bumitama Agri (BAL) is making up for lost time, as its share price is finally catching up with peers’ and is moving in line with rising crude palm oil (CPO) prices.

According to a report by UOB Kay Hian, thus far in 2016, BAL’s share price has jumped 31.2%. Though this is still down 7.5% YoY, there are further upsides supported by BAL’s strong earnings growth of 27% in 2016 and 19% in 2017. Earnings growth in 2016 to 2017 is bolstered by fresh fruit bunch (FFB) production growth of at least 8-12% and higher CPO average selling price (ASP).

Meanwhile, CPO prices have been trending up since December 2015 to a recent high of RM2,712/tonne. UOB expects CPO ASP to climb 16% YoY in 2016, which would benefit BAL significantly given its ability to deliver positive FFB production growth.

Moreover, BAL production growth is well-supported by young areas. The company is able to deliver an 8% FFB production, mainly supported by prime-age oil palm trees (which comprise 30% of total area) which can endure dryness better than young and older trees.

In addition, about 15,000 ha (which comprise 12% of mature area as at end-2015) of planted areas are moving into mature age of 4, while 14,000 ha of young mature area (which comprise 17% of prime area) are entering prime production age.

UOB also reports that BAL can still deliver one of the best oil extraction rates (OER) of 22.9% in 2015.

“This is worth highlighting despite close to one-third of its total processed FFB were from third-party purchases, which usually give lower OER due to lower harvesting standards,” asserts UOB.

Further, despite robust price performance, BAL is still one of the cheapest plantation companies with a planted landbank of more than 100,000 ha. BAL is currently trading at 12.7x 2016F PEm and 10.6x 2017F PE versus peers’ 15-17x 2016F PE.