First Resources (FR SP) - Solid Performance To Stay
- First Resources (FR) delivered a good set of earnings for 2016 and surprised the market with a 5% yoy core net profit growth. 2017 should deliver another good set of numbers on the back of mid-teen production growth and good selling prices.
- Cash position is building up on low capex and good profit, with a potentially higher dividend payout (from about 30% currently).
- Maintain BUY. Target price: S$2.15.
Strong earning momentum to continue into 2017.
- First Resources (FR) posted a very strong set of 2016 results with core net profit of US$114.9m (+5.1% yoy). 2017 should be a better year for FR on the back of positive production growth and stable CPO prices. FR focuses on selling refined products. For 2016, sales volume for refined products was higher than its CPO production. Cash is building up in anticipation of good production growth (estimated 4-year CAGR of 12%) and low capex cycle (minimal new planting).
- Eventually, FR will be a net cash company (assuming no M&A and no weather disruption), hence it could be a dividend play.
Guides 15% FFB production growth for 2017.
- We deem management’s guidance as very conservative given West Kalimantan production is expected to show good FFB yield (less impacted by the 2015 El Nino and have younger trees). We are maintaining our expectation of an 18% growth. 2017 production growth will also be supported by 17,000ha of new areas coming into maturity (10.7% of 2016 mature area). These new areas should provide about 3% FFB production growth.
- Management also said the younger areas could see the potential FFB yield as in 2015 but FFB yields for the older trees are unlikely to recover that fast, ie will still be below 2015 yield for the same estates.
Biodiesel still making decent margins even on new prices.
- FR has no plans to expand biodiesel capacity, ie it is keeping to 200,000mt per year. We expect the new CPO pricing and weaker CPO prices will allow the Indonesian CPO Fund to be utilised to subsidise the higher volumes of biodiesel (PSO and non-PSO) and this will help absorb the expected large CPO supply coming on stream in 2H17.
- Total biodiesel consumption in Indonesia was close to 2.9m kl in 2016, higher than market expectation of 2.5m kl. For 2017, it should maintain blended volume of at least 2.9m kl. FR’s biodiesel supply to Pertamina is close to 100% of the contractual volume (contracted volume for Nov 16-Apr 17: 55,338 kl) and the next tender is likely to open in Mar 17 for delivery in May 17-Oct 17.
Good production volume has been sold forward.
- During the briefing, management mentioned that the company has entered forward selling for its 2017 production without disclosing the committed volume and prices. However, management clarified that the locked-in prices are not much higher than the futures prices traded now for the longer-end period as the market has, since late-16, factored in stronger production in 2H17. Thus, the forward curve has been stiff with much higher spot prices vs forward prices.
- The price curve has flattened a lot over the last few weeks.
Organic growth is a challenging now with tighter regulatory control on land use and sustainability.
- The guidance for 2017 new planting is only about 2,000ha vs the 1,116ha planted in 2016.
- Expansion through acquisition is always possible but it must be at the right pricing. FR has a strong balance sheet to make substantial acquisitions. Its net gearing improved to 0.2x as at end-16 (2015: 0.37x).
- Strong cash accumulation will continue as FR has no major capex (guided capex for 2017 is US$80m, or 32% 2016 EBITDA).
- Maintain net profit forecasts.
- We forecast EPS of 9.1 US cents and 9.5 US cents for 2017-18 respectively.
- Maintain BUY and target price of S$2.15, based on 17x 2017F PE (or its 5-year mean PE).
- FR proposed a final dividend of 2.375 S cents/share. Including the interim dividend of 0.625 S cents/share paid in Sep 16, total dividend is 3.0 S cents for 2016 (2015: 2.5 S cents), or a 29% payout.
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- Better-than-expected CPO prices. FR’s earnings are still largely contributed by upstream operation, making its earnings highly sensitive to CPO prices. Any increase in CPO selling prices from our base case of RM2,600/tonne would be positive to its earnings.