Raising earnings to support valuation re-rating
- BAL enjoys prime age cycle with decent selling price, which translate into 22.6% y/y earnings growth in 2025
- Recovering output bodes well for margin given less reliance on higher cost external fruits
- Valuation re-rating to resume with consistent earnings
- Maintain BUY with TP of SGD1.30
BAL offers double-digit earnings growth, supported by a decent palm oil selling price and recovering CPO production volumes. Recovering palm oil output also bodes well for BAL’s margin since it will result in less reliance on higher cost external fruits purchases. Its earnings are set to recover next year with higher production volumes and better cost savings. We forecast earnings growth of 22% y/y to reach IDR2.3tn in 2025.
This year, despite the tumbling output, BAL managed to churn IDR500bn in earnings, which we think demonstrates its prudent profit maximisation strategy. NPAT/kg compressed to IDR1,948/kg in 2Q24 and 3Q24, despite rising CPO prices due to weaker production. Going forward, we forecast NPAT/kg of IDR2,400-2,500/kg with a steady CPO selling price of IDR11,000/kg (net) in 2025F-2026F.
BAL could not escape weak output in 2024
While the CPO selling price has been decent this year, BAL suffered from weak output due to torrential rain and the effects of El Niño in late 2023. BAL’s output dropped by 12.3% y/y to 793k MT in 9M24 , despite its young trees age profile.
BAL’s declining output in 2024 is understandable, as the industry experienced a similar trend. Companies with high exposure to Kalimantan estates are impacted the most, even companies with a younger trees age profile. Across the board, Indonesia listed palm oil companies suffered from a 11% y/y drop in output in 9M24.
We forecast steady earnings of IDR500bn in 4Q24, as we do not expect any seasonal boost to output toward the end of the year, as BAL will achieve peak crops in November 2024. As such, we cut our earnings forecast by 19% to IDR1.9tn (-20.7% y/y) in 2024F, before expecting earnings to recover in 2025.
Maintain BUY with TP of SGD1.3
We raise our TP to SGD1.3 and maintain our BUY rating, as we roll forward our valuation year to FY25F, coupled with higher earnings forecast from 2025 onward. Our TP implies 11x FY25F PE, higher than its five-year historical average PE of 5.0x.
Historically, BAL has been trading at a 40%-50% discount to its upstream plantation peers due to its market capitalisation and relatively thin trading volumes, despite its strong fundamentals. The share price re-rated from 5.0x to 8.0x, and we believe this trend should continue, as BAL has consistently proven that it can deliver a strong earnings trend and is building up cash to fuel its inorganic growth or potentially increase its payout ratio.
| FY Dec | 4Q2018 | 3Q2019 | 4Q2019 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Revenue | 2,205 | 1,944 | 2,292 | 4.0 | 17.9 |
| Cost of Goods Sold | (1,681) | (1,434) | (1,712) | 1.9 | 19.4 |
| Gross Profit | 524 | 510 | 580 | 10.7 | 13.7 |
| Other Oper. (Exp)/Inc | (146) | (154) | (157) | 7.9 | 1.9 |
| Operating Profit | 378 | 356 | 423 | 11.8 | 18.8 |
| Other Non Opg (Exp)/Inc | (41.5) | (16.4) | 83.2 | nm | (608.1) |
| Associates & JV Inc | 5.21 | 5.41 | (9.45) | nm | (274.7) |
| Net Interest (Exp)/Inc | (8.89) | (16.5) | (9.14) | (2.9) | 44.7 |
| Exceptional Gain/(Loss) | 0.00 | 0.00 | 0.00 | nm | |
| Pre-tax Profit | 333 | 328 | 487 | 46.4 | 48.5 |
| Tax | (79.1) | (99.1) | (161) | 103.7 | 62.6 |
| Minority Interest | (46.3) | (39.4) | (64.6) | (39.5) | 64.1 |
| Net Profit | 207 | 190 | 261 | 26.1 | 37.9 |
| Net profit bef Except. | 207 | 190 | 261 | 26.1 | 37.9 |
| EBITDA | 342 | 345 | 496 | 45.3 | 44.0 |
| Margins | |||||
| Gross Margins (%) | 23.8 | 26.2 | 25.3 | ||
| Opg Profit Margins (%) | 17.1 | 18.3 | 18.4 | ||
| Net Profit Margins (%) | 9.4 | 9.8 | 11.4 |
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