First Resources - FBB Output To Boost Earnings
- First Resources closed 2016 with its FFB output declining by 6.4%. This is an improvement from management’s guidance of a 10% decline, but in line with our projections.
- We expect FFB growth to return to normal levels of 5-10% going forward.
- We also raise FY16 earnings forecasts by 19% and FY17-18 by 2-5% to reflect higher PK prices while adjusting our latest in-house forex assumptions.
- We believe valuations are fair at current levels, already reflecting the stronger earnings growth outlook.
- No change to our NEUTRAL recommendation but slightly raise our TP to SGD2.00 (from SGD1.80, 3% upside).
Decent recovery in FFB output in 4Q16.
- First Resources’ FFB production showed a decent recovery in 4Q16, rising 12% QoQ from 3Q and 14% YoY. This led to a decline in its FY16 FFB output, moderating to -6.4% (from -14% in 9M16). This is higher than management’s guidance of -10% YoY decline, but in line with our projection of -7% YoY for FY16.
FFB growth to return to normal from FY17.
- Going forward, we expect First Resources’ FFB growth to return to its normal from FY17, as its trees fully recover from the El Nino impact.
- We expect the company to register FFB growth of 5-10% pa for FY17-18, as there is not much contribution from new areas coming into maturity over the next few years.
- We raise our earnings for FY16 by19% and FY17-18 by 2- 5% taking into account:
- Higher PK prices (+24% for FY16/17) on the back of the current supply crunch for lauric oils;
- The change in our in-house USD/IDR assumptions to 13,700 (from 13,300) for FY17/18.
- Post-earnings revision, we raise our TP to SGD2.00, which implies 2017F P/E of 19x and EV/ha of USD13,000. This is in line with its peers, which trade in the USD10,000-15,000/ha range.
- First Resources’ large exposure to Riau (67%) puts it at risk in the face of weak weather-led productivity, while valuations look fair at current levels.
- Key risks to our call include the weather, as well as global supply and demand dynamics of edible oils.