Bumitama Agri Ltd – Green shoots

Excerpts from OCBC Investment Research report

Bumitama Agri Ltd (SGX: P8Z)

• Bumitama Agri has a superior productivity which is a key competitive advantage, supported by high quality plantations and best management / agricultural practices
• Supply constraints and growing domestic demand from biodiesel mandates support long-term industry fundamentals

Attractive dividend yield amidst undemanding valuations

Leading upstream producer

Bumitama Agri  (BAL) is a leading upstream producer of crude palm oil (CPO) and palm kernel (PK) in Indonesia. It operates a total planted area of 187k hectares (ha) across Central and West Kalimantan, as well as Riau, areas well suited for oil palm cultivation. BAL’s superior productivity, high quality plantations, and continued focus on maximising its current plantations position it well to deliver on above industry average yields and to capitalise on supportive long-term industry fundamentals.

BAL is well positioned to capitalise on supportive long term industry fundamentals

Despite the current softness in CPO prices, long-term fundamentals of the palm oil industry remain intact, in our view. Global CPO production is expected to enter an era of deceleration hereon, constrained by a slowdown in palm oil plantation expansion, ageing plantations, and unfavourable weather conditions like El Niño. Meanwhile, demand is expected to shift towards more domestic consumption, supported by the growing traction of biodiesel mandates. Given the strategic importance of the palm oil industry to the Indonesian economy, government regulations have thus far been supportive, and we also note the greater emphasis on sustainability over the years. BAL’s superior productivity, high quality plantations, and continued focus on intensification rather than expansion position it well to maintain above industry average yields and to capture greater market share. As such, we look favourably upon the specialised upstream player’s growth profile going forward.

Valuation/Recommendation

Initiate coverage on BAL with SGD0.67 FV estimate. We apply a FY24E target P/E multiple of 5.7x and a slight ESG premium to value BAL, obtaining a FV estimate of SGD0.67. BAL’s current valuations are undemanding, as it is trading at a forward 12M P/E ratio of 5.5x, representing more than one standard deviation (s.d.) below its five-year historical average of 8.3x. Meanwhile, Bloomberg consensus estimates are pricing in a forward dividend yield of 7.7%, representing more than one s.d. above the company’s five-year historical average of 5.2%. Taken together, this could present an attractive entry point for long-term investors looking to lock in a higher-than-average dividend yield. That being said, we caution that investors may need to remain patient with the stock in the near term, as the industry tides through the current period of normalisation and softness in CPO prices.

You can find the full report here and the company website here.