First Resources - Aggressive recovery
Backloaded volume growth.
- We expect First Resources (FR) to book a strong 48% sequential recovery in 4Q16 earnings – premised on better ASP and seasonal yield uptick.
- We also expect relatively strong crude palm oil (CPO) and palm kernel (PK) average prices to continue this year; partly offset by slightly lower expected biodiesel output.
- In this report, we upgrade our rating to BUY on 11% potential upside.
FY16F/17F/18F earnings revised by +8%/+28%/+16%.
- We tweaked our earnings projections to account for higher CPO/PK price forecasts, as well as slightly faster recovery in FY17F FFB yield than previously anticipated.
- External FFB purchases were also 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.1% p.a. from previous forecasts
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 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).
- We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$2.19/share (WACC 11.7%, Rf 8.4%; Rm 13.3%; β 1.0x; TG 3%) – raised from S$1.90 previously.
- We believe the counter’s strong expected earnings growth has not been priced in.
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.