Bumitama Part 3.1 (2016 Q3 result)

Bumitama released its 2016 Q3 result yesterday. As expected, both revenue and net profit grew because of higher CPO price. Revenue grew by 26.8% yoy to IDR 1.5 trillion while net profit attributable to shareholders grew by 29.2% yoy to IDR 206 billion. For first 9 months of 2016, net profit attributable to shareholders grew by 11.5% to 543 billion.

Bumitama - Financial 16Q3.PNG

Source: Bumitama’s FY16 Q3 presentation

Production

The production figure was already released on 24th October, so there wasn’t anything new. Q2 production was a disaster. Q3 production did much better even though it’s still lower yoy. Q3 FFB Nucleus production grew by 1.3% yoy, and total FFB production fell by 5.5% yoy mainly because a sharp 17.4% drop in FFB purchased from third party (External).  Overall CPO production fell by 8% yoy.

Bumitama - Operation 16Q3.PNG

Source: Bumitama’s FY16 Q3 presentation

As I mentioned in my previous post, supply issues occur across the sector. Malaysia is the second largest palm oil producer in the world, behind Indonesia. You can check Malaysia’s palm oil production at this link. The Crude Palm Oil (CPO) production for the first 10 months of 2016 is 15.5% lower than that in 2015. That’s a sharp drop! Over long term, palm oil demand grows at around 3-5% per year and can fluctuate -5% to +5% in any year. It’s normal that such sudden supply shortage is followed by price hike. Those with this knowledge can benefit from it.

Indonesia government do not publish (have) such statistics, but given the proximity of both countries, you can reasonably expect the situation to be similar. First Resources and Bumitama have their plantation estate located 100% in Indonesia, and both suffered more than 10% drop in production volume this year.

CPO Price

Like all commodities, CPO price rises when there is a supply squeeze. You can monitor CPO price at this link. Generally, in palm oil sector, the rising prices will more than offset the lower production volume, hence, the producers benefit more in such supply squeeze situation.

Which one to invest?

The reasons I invested in First Resources and Bumitama are 1) both are low cost operator, 2) both have young plantation estate (average 8 to 10 years old ), providing a 10+% growth in volume for next few years, 3) both focus more on upstream than downstream.

Upstream business have higher margin and return on capital, while downstream have lower margin and volatile return. You can read up here about the difference between upstream and stream and palm oil business in general.

Why Bumitama?

I explained in my other posts on Bumitama (here and here) why it’s attractive to buy at 0.745, so I won’t repeat it again here. In short, I think the market has been ignoring Bumitama after its disappointing Q2 production. I understand palm oil industry and know that short term production issue can happen from time to time. On average, Bumitama has been doing a decent job, so I’m not worried about Q2 production issue. That’s actually an opportunity to buy at dip.

I added my position in Bumitama at 0.73 few days ago and at the same time sold my position in First Resources, which I think is nearly fully valued. CPO price is still in the range of RM 2800-2900/mt at the moment. I hope it lasts longer to give investors more confidence to buy into Bumitama.

If CPO price suddenly falls sharply to its normal range of RM 2200-2400/mt, I’m not worried either as my estimate of Bumitama’s fair value is above 1.0 based on normalized CPO price of RM 2400/mt. Its production should recover next year, and in normal time, has annual growth rate of 10+% for next few years.

In the past 2 days, Bumitama’s share price rose by 6%. There is still much room to grow and all I can do now is to wait patiently.

Bumitama - share price - 2016-11-15.PNG

Source: Google Finance for Bumitama’s share price

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