First Resources (FR SP) - UOB Kay Hian 2017-02-03: 4Q16 FFB Nucleus Production Comes In Slightly Stronger Than Expected

SGinvestors.io

FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - 4Q16 FFB Nucleus Production Comes In Slightly Stronger Than Expected

• First Resources (FR)’s FFB nucleus production fell 6.4% yoy in 2016; this is slightly better than our and management’s expectations of 9.6% yoy and 10% yoy declines. 
• We expect better qoq and yoy 4Q16 earnings on: 
  1. improved FFB production and higher CPO prices, and 
  2. stable contribution from downstream operations. 
• We adjust our FFB production growth estimates for 2017-18 and hence raise our net profit estimates by 5% and 13% respectively. 
• Maintain BUY with a higher target price of S$2.15.

WHAT’S NEW

4Q16 FFB nucleus production slightly stronger than expectations. 

• First Resources’ (FR) 4Q16 fresh fruit bunch (FFB) nucleus production improved qoq and yoy. 
• For 2016, FFB nucleus production declined 6.4% yoy, but this is slightly better than our and management’s expectations of 9.6% yoy and 10% yoy declines respectively. 
• The positive variance was mainly due to the stronger-than-expected recovery in FFB.

Expect better qoq and yoy 4Q16 earnings. 

• We forecast 4Q16 core net profit of US$38m- 43m (3Q16: US$36m, 4Q15: US$21m). We expect better qoq and yoy 4Q16 earnings on: 
  1. improved FFB production and higher CPO prices, and 
  2. stable contribution from downstream operations. 
• FR is targeting to release its 4Q16 results on 27 Feb 17 after market close.

STOCK IMPACT

Deferred tax income recognition could have boosted 4Q16 net profit. 

• 4Q16 net profit is expected to be higher than our core net profit forecast of US$38m-43m as management indicated that FR would report a deferred tax income arising from government incentives for the revaluation of assets in 4Q16. 
• However, we understand that the quantum of the deferred tax income would not be substantial as management is likely to adopt a more conservative write-back so as prevent a distortion in core earnings.

Expect stable downstream operational results for 4Q16. 

• Refining volume is expected to have remained high qoq and yoy on the back of better production. However, refining margin could be lower qoq and yoy. Thus, we are expecting a flat or a marginal increase at best in refining earnings for 4Q16. 
• Nevertheless, refining volume will be supported by contributions from biodiesel sales to Pertamina.

Higher CPO production qoq and yoy, in line with the increase in FFB production. 

• CPO production increased 12.7% qoq and 19.0% yoy in 4Q16 on the back of an improved oil extraction rate (OER). For 2016, CPO production dropped 7.6% yoy.

Expect higher CPO prices qoq and yoy for 4Q16. 

• In 4Q16, Indonesia Dumai/Belawan CPO prices inched up 3.8% qoq but surged 38.4% yoy. The substantial increase in CPO prices was mainly due to tight supply and stable export demand. 
• All in all, we reckon CPO prices will hover at US$650-750/tonne in 1H17, and are likely to decline when production picks up in 2H17.

Raise FFB production growth forecasts for 2017-18. 

• We raise our FFB production growth forecasts to 18.1% yoy (from 17.9%) and 19.2% yoy (from 16.9%) for 2017-18 respectively as we expect a stronger FFB yield recovery. 
• We expect FR’s FFB production growth to be supported by a production recovery at its estates in Riau and West Kalimantan.

EARNINGS REVISION/RISK

Raise net profit forecasts. 

• We maintain our EPS forecast for 2016, and raise our 2017- 18 EPS forecasts by 5% and 13% respectively on our higher FFB production growth assumptions.
• We forecast EPS of 6.6 US cents, 9.1 US cents and 9.5 US cents for 2016-18 respectively.

VALUATION/RECOMMENDATION

• Maintain BUY with a higher target price of S$2.15 (up from S$2.00), post earnings adjustment. 
• Our target price is 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.

Ooi Mong Huey UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-03

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.15 Up 2.000