Bumitama Part 3

While I’ve been making profitable trades in First Resources several times, the same can’t be said for Bumitama, unfortunately.

In my previous post on Bumitama in March (see this post), I was sitting on 23.5% paper profit. I bought the shares at 0.745 in December 2015, and three months later, the share price rose to 0.92. That was the peak and lasted for two weeks only. Since then, Bumitama’s share came crashing all the way to 0.675 in early August. That’s 26% drop in 4.5 months. At the bottom, I was sitting 10% paper loss.

Today, it climbed back to 0.725, so my lost was cut to just -3%. I don’t pay much attention when the profit or loss with within -5% and +5% because weekly price fluctuation can move that much in any direction in short term. You can never time it consistently, so don’t even try.

My mistake was not in buying at 0.745. It was right decision to buy at that price. My analysis was correct (re-read that post). My mistake was in not selling at 0.90s. +23.5% return in 3 months was fantastic, but I held on because my valuation estimate for Bumitama was above 1.00. So, I thought there was room to appreciate.

As it turns out, Bumitama’s Q1 production was a disappointment. FFB yield fell by 24.4% yoy and internal FFB production dropped by 7.2% yoy. Q2 production was a disaster. FFB yield was down 40.5% yoy! Overall 6M16 FFB yield was -32.5% yoy, and the FFB production (internal) and CPO production were -17.6% and -15.3% yoy respectively.

Bumitama - Production 16Q2.PNG

Source: Bumitama’s 2016 Q2 Presentation

My previous post on First Resources (see here) explains that the supply is expected to be much weaker this year due to severe drought in early 2015. If the demand stays stable, then the price should be strong this year. This hypothesis remains valid, at least to me. So, I will continue holding Bumitama.

Given the stronger CPO price expected for this year, Bumitama should be priced at a higher level. I think it’s the disappointing production that pissed off the investors. The 32.5% drop in FFB yield was huge,  and was probably among the worst, if not the worst in the sector.

Despite the bad production, net profit for 6M16 actually grew by 2.8% yoy. That’s because Bumitama sold down the inventory. The CPO production for 6M16 was only 287kt, but the sales volume was 343kt, same as the corresponding period for last year.

Again, my view on Bumitama’s production is that it shall recover to normal level in the following year, like what First Resources and others should experience. Its plantation estate is young and has strong production growth ahead. When the production recovers, double-digit growth will be expected and earnings growth will follow, assuming that the CPO price averages in the range RM 2,300 – 2,500. This should be able to push the share price higher. For now, the terrible production might make investors stay away from the stock, thus price recovery might take longer time. It’s testing my patience.

However, Palm oil business is not as simple as expecting the production to revert to mean after a bad year. Some companies tend to maintain better consistency than others. Some tend to disappoint year after year for different reasons. Indofood Agri, for example, has issues with production for many years and continues to experience escalating costs. I remember my conversation with a CIMB analyst, who said that after covering it for many years, she was disappointed with the repeated pattern of rising costs issues. Note the pattern. You want to avoid such companies in investing. Do not bet that the pattern will turn without having any insight.

For Bumitama, the production growth has been solid in the past 5 years. Mature planted area doubled. Both FFB and CPO production slightly more than doubled. Look at the table below for the summary.

Bumitama - Operation 2015.png

Source: Bumitama’s 2015 Annual Report

But, the combination of falling CPO price and rising costs dragged the margin lower, and latest FY15 earnings were just slightly higher than those five years ago. The market punishes it heavily when a growth stock fails to meet the market expectation. Bumitama’s current share price is 25% below its IPO price. So, the five years of effort to double the production was rewarded with 25% fall in market value.

Although I like its assets, I have to pay closer attention to its development. If it keeps producing negative news, then it’s probably the management’s problem and is a serial underperformer.

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