First Resources - DBS Research 2016-10-24: Crowded trade

First Resources - DBS Research 2016-10-24: Crowded trade FIRST RESOURCES LIMITED EB5.SI

First Resources - Crowded trade


Backloaded volume growth. 

  • We expect First Resources (FR) to book strong recoveries in 3Q16 and 4Q16 earnings – premised on better ASP and seasonal yield recovery. This will be partly offset by lower EBITDA contribution from processing and refining segment, as we impute a drop in biodiesel volume for the year (based on government allocations year-to-date) – vis- à-vis our previous expectations. 
  • We believe the brunt of El Nino impact is more than priced in. 
  • In this report, we downgrade our rating to HOLD on limited 8% potential upside.


FY16F/17F/18F earnings revised by -4%/-4%/+3%. 

  • We tweaked our earnings projections to account for minor changes in CPO price forecasts; as well as slower recovery in FY17F FFB yield than previously anticipated. Offsetting this, external FFB purchases were revised higher from FY17F – on expectations of FFB yield recovery from adverse impact of 2015 El Nino – to optimise the group’s mill utilisation rate. 
  • FR’s CPO output is consequently raised by c.2% p.a. – thereby raising the group’s top lines and free cash flows throughout our DCF forecast period.


Volume growth to decelerate from 2019. 

  • FR’s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to the group’s strong volume and earnings growth through FY18F. 
  • Subject to any opportunistic acquisitions, we expect FR’s output growth to decelerate from FY19F, as new planting is forecast to moderate from FY16 onwards (excluding new acquisitions).


Valuation

  • We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$1.90/share (WACC 12.6%, Rf 8.1%; Rm 15.0%; β 0.9x; TG 3%) – raised from S$1.80 previously. 
  • We believe FR’s earnings recovery is already partly baked into the current share price.


Key Risks to Our View

  • FR’s share price is linearly driven by CPO price expectations and partly by refining/biodiesel margins. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. 
  • CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina.
  • Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.




Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-10-24
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 1.90 Up 1.800



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