First Resources (FR SP) - UOB Kay Hian 2016-10-27: FFB Production Jumps qoq As Expected

First Resources (FR SP) - UOB Kay Hian 2016-10-27: FFB Production Jumps qoq As Expected FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - FFB Production Jumps qoq As Expected

  • Yesterday, First Resources reported its FFB production for 3Q16 which is in line with our expectation. 
  • 3Q16 FFB nucleus production jumped qoq on the back of strong FFB yield recovery, but remained low on a yoy basis. 
  • We expect another round of strong FFB production in 4Q16 and FR to meet our 2016 full-year forecast of 2.3m tonnes (- 9.6% yoy). 
  • The refining division is expected to post a turnaround in 3Q16 along with a qoq increase in refining volume. 
  • Maintain BUY. Target price: S$2.00.


WHAT’S NEW


3Q16 FFB production within expectation. 

  • First Resources’ (FR) 3Q16 fresh fruit bunch (FFB) nucleus production improved significantly on a qoq basis (+43.3% qoq and in line with our expectation), but was lower yoy (-11.3% yoy). The jump in 3Q16 was supported by strong FFB yield recovery. 
  • For 9M16, FFB nucleus production reached 1.6m tonnes (- 14.0% yoy), accounting for about 70% of our 2016 estimate. 
  • We expect 4Q16 FFB nucleus production to fulfill the remaining 30% of our 2016 estimate. Hence, we believe FR will be able to meet our FFB production forecast of 2.3m tonnes for 2016. 
  • FR is targeting to release its 3Q16 results on 9 Nov 16 after the market close.


STOCK IMPACT


3Q16 results preview. 

  • We are expecting a 3Q16 core net profit of US$35m-38m (2Q16: US$26.1m, 3Q15: US$31.7m).
    1. Upstream contribution – Higher qoq and yoy. We expect better qoq EBITDA contribution for 3Q16 (2Q16: US$58.9m) on the back of stronger FFB production but CPO prices are likely to stay flat qoq. Meanwhile, EBITDA contribution is likely to be higher yoy as the substantial yoy increase in CPO prices is sufficient to offset the decline in FFB production in 3Q16.
    2. Refining EBITDA to recover qoq but drop yoy. Refining volume is likely to have been better qoq in 3Q16 on the back of a recovery in production. We should see a turnaround in refining EBITDA for 3Q16 (vs the loss of US$7.2m in 2Q16).
  • Meanwhile, refining volume on a yoy basis is likely to decline in 3Q16. Nevertheless, refining volume will be supported by the contributions from the sales of biodiesel to Pertamina in 3Q16 (no biodiesel sales in 3Q15).

Higher qoq CPO production but still down on a yoy basis. 

  • In line with the increase in FFB production, total CPO production increased 44.2% qoq in 3Q16. However, CPO production was down 13.3% yoy in 3Q16. 
  • For 9M16, CPO production dropped 16.5% yoy.

Expect CPO prices to be flat qoq but higher yoy for 3Q16. 

  • In 3Q16, Indonesia Dumai/Belawan CPO prices were flat qoq, but increased by a significant 30.7% yoy. The substantial increase in CPO prices was mainly due to tight supply since 1H16 and stable demand from exports. 
  • All in all, we reckon CPO prices will hover at RM2,400-2,800/tonne in 4Q16. Thus, we maintain our average CPO price forecast of RM2,500/tonne for 2016.


EARNINGS REVISION/RISK

  • Maintaining net profit forecasts. We forecast an EPS of 6.6 US cents, 8.6 US cents and 8.4 US cents for 2016-18 respectively.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$2.00, based on 17x 2017F PE (5-year mean PE).
  • FR is one of our preferred picks in the plantation sector for its cost efficiency and hands-on management.


SHARE PRICE CATALYST

  • Rally in CPO prices.
  • Sustainability of better-than-peers’ downstream margins.




Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-27
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.00 Same 2.000



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