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Bumitama Agri Ltd’s Latest Earnings: Is the Company’s Long-Term Outlook Intact after A 41% Collapse in Profit?

Palm oil producer Bumitama Agri Ltd (SGX: P8Z) had released its fiscal first-quarter earnings on Tuesday for the three months ended 31 March 2015.

The first nine months of 2014 was a great time for Bumitama Agri as it displayed great revenue and profit growth (see table below). Despite a weak fourth-quarter, the firm still managed to clock a solid 42% and 35% increase in annual revenue and profit, respectively.

Bumitama Agri's quarterly revenue and profit growth for 2014

Source: Bumitama Agri’s earnings releases

Unfortunately, Bumitama Agri’s latest earnings release showed that the malaise which appeared in the final quarter in 2014 still seems to be around.

Financial highlights

For the first quarter of 2015, the palm oil producer’s revenue slipped by 1.7% year over year to IDR1.33 trillion. Because of higher cost of sales, Bumitama Agri experienced a 12.2% fall in gross profit to IDR465 billion.

These dynamics, along with a huge spike in loss of associate companies (the figure jumped from –IDR1.29 billion a year ago to –IDR43 billion), had weighed heavily on the firm’s bottom-line. Bumitama Agri ended its fiscal first-quarter with a profit of IDR181.6 billion, down 41% from a year ago.

The cash flow picture left much to be desired too. In the first quarter of 2015, Bumitama Agri had IDR155.9 billion in operating cash flow, IDR168.8 billion in capital expenditures and thus –IDR12.9 billion in free cash flow (operating cash flow minus capital expenditures); the selfsame figures a year ago were IDR336.6 billion, IDR108.8 billion, and IDR227.8 billion respectively.

Bumitama Agri’s balance sheet had also weakened compared to a year ago. As of 31 March 2015, the palm oil producer had a net-debt to equity ratio (where net-debt refers to total borrowings minus total cash) of 61.4%; at end-March 2014, the ratio was just 52.6%. It’s worth noting that the firm’s balance sheet may not be improving anytime soon given that the firm’s still actively increasing its palm oil production capacity.

Operational highlights

Most of the important operational metrics for Bumitama Agri had showed healthy growth as you can see in the table below, which is a sign that the firm’s operations are humming along nicely.

Bumitama Agri's production statistisc

Source: Bumitama Agri’s earnings release

But, due to a much lower average selling price for Bumitama Agri’s products, which is something beyond the firm’s control, the increase in volume (in CPO and PK) couldn’t be translated into revenue and profit growth.

The palm oil outfit ended 31 March 2015 with a total planted area of 149,795 hectares, up slightly from 149,683 hectares a year ago. Bumitama Agri’s weighted average age of its trees stand at 6.9 years as at 1 January 2015. For some perspective, palm oil trees enter their prime productive phase between the ages of eight and 17.

An outlook and my Foolish takeaway

In the earnings release, Bumitama Agri’s management stated that “crude palm oil prices are expected to remain soft in the near term due to ample supply of other competing vegetable oil [sic] like soyoil, weak crude oil prices and concerns on lackluster demand for palm oil as the price between soyoil and CPO narrows.”

Put another way, management is not optimistic at all about the short-term outlook for the industry. There’s an oversupply of CPO in the market and that may prevent CPO prices from recovering in the near-term.

But, management also believes that there are reasons for optimism. “Indonesia’s mandate to increase blending rate of palm oil to diesel oil from 10% to 15% (B15), increase biodiesel subsidy to IDR 4,000 per litre and plans to impose levy on export to fund the B15 programme,” Bumitama Agri’s management wrote, “should provide support to prices by sustaining demand for biodiesel.”

Over the longer-term, management’s also of the opinion that the “palm oil industry fundamental [sic] remains strong as palm oil is the most consumed edible oil in the world.”

With all these comments we just saw from Bumitama Agri’s management, it would appear that they’re bearish on the short-term, but still bullish on the long-term.

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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 doesn’t own shares in any companies mentioned.