Would Bumitama Agri Ltd Be A Worthwhile Investing Opportunity Now?

Bumitama Agri Ltd  (SGX: P8Z) has a simple business model. It plants oil palm trees in Indonesia (mainly in Kalimantan), harvests the fruits, and then sends them to crude palm oil mills to undergo the extraction process.

At the end of it, Bumitama’s final products from the mills are crude palm oil (CPO) and palm kernel oil.

The company is a relatively new face in Singapore’s stock market, having been listed only in 2012. Since then, the company has mostly been enjoying great growth, as you can observe in the chart below.

Bumitama - revenue and profit growth from the second-quarter of 2013 till the third-quarter of 2014

Source: S&P Capital IQ

But in the fourth quarter of 2014, Bumitama experienced a sudden 30% drop in profit.

Lower CPO selling prices had led to a weaker gross margin. Meanwhile, fair value losses for its biological assets were also recorded by the company. These factors had heaped pressure on Bumitama’s bottom-line.

But given Bumitama’s strong historical growth over the past two years and decent-looking valuation currently (a PE of 14 at a price of S$1.00 per share now), it’s perhaps worthwhile asking – is the company’s sharp profit decline in the fourth quarter of 2014 a temporary drop or the beginning of something worse?

If it’s the former, then Bumitama may just be an interesting investing opportunity.

Issues that are temporary

The loss arising from fair value changes in biological assets that Bumitama suffered in the fourth-quarter of 2014 was predominately due to the depreciation of the rupiah against the U.S. Dollar.

Both the depreciation of the rupiah and the drop in CPO prices (another factor which caused Bumitama’s profit to fall) are market-driven factors which the company cannot really control.

More important, these issues – fluctuating currencies and commodity prices – hardly seem like permanent problems.

Issues that might be long-lived

There are actually more pressing issues surrounding Bumitama’s business operation with a key item being how the firm’s operating expenses seem to be growing much faster than revenue.

For example, in the fourth quarter of 2014, Bumitama’s revenue had increased by a healthy 21% compared to a year ago. However, its selling expenses spiked by 82%.

That’s a worrying sign as the company commented that the increase in its selling expense had partly been due to the rise in higher average freight cost and higher volume of CIF (cost, insurance, and freight) sales terms. Both do not seem to be expenses that will be reduced in the future.

Foolish Summary

The long-term future of Bumitama Agri still looks bright to me. With its trees having a weighted average age of 6.9 years, Bumitama has one of the youngest plantations amongst other oil palm players listed in Singapore.

Furthermore, the company’s balance sheet is still relatively strong with an EBIT (earnings before interest and taxes) interest coverage ratio in 2014 of about 19 , which is a very safe figure.

But all that said, investors should keep an eye out for how Bumitama manages its expenses in the future lest the firm gets snagged by cost overruns. Only time will tell if Bumitama can curtail its fast-growing expenses.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any company mentioned above.