First Resources - Sustained By Decent FFB Output
- We believe it is time to lock in some profits for the sector, as we expect CPO prices to be on a downtrend from hereon, given the abundant supply coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April onwards. This is on top of the still-lacklustre demand from China and India. The wildcards are Indonesian biodiesel mandates and weather risks.
- We maintain our NEUTRAL recommendation.
- Our lower TP of SGD1.80 (from SGD1.90, 9% downside) implies an EV/ha of USD11,500/ha, in line with its peers.
CPO prices on downward trend.
- We believe CPO prices would be on a downtrend from hereon, given the abundant supply of CPO coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April onwards.
- Demand continues to be sluggish, and is not expected to recover to previous levels of growth of 5-6% pa, despite the current still relatively low stock levels in Malaysia and Indonesia.
Market is forward looking.
- We believe the market is forward looking and investors should therefore look to lock in profits. CPO prices have already started to moderate from its high of MYR3,300/tonne in January to MYR2,900/tonne currently. The price gap between CPO spot and futures prices has widened to MYR200/tonne (from MYR80/tonne a few weeks ago), while the price gap between CPO and soybean oil prices has widened back to around USD60/tonne currently (from USD13/tonne a month ago).
- While the price premium between soybean oil and CPO is still far from the historical averages of USD100-150/tonne, we believe there is still room for the premium to widen.
Demand is not likely to recover in 2017.
- While the story about the supply recovery is well known, there have also been expectations that demand will make a comeback in 2017. However, we believe this is not to be, with the global economy still struggling to grow and domestic consumption still at sluggish levels.
- Therefore, despite the fact that inventories of CPO at the importing countries are at low levels currently (2.2m tonnes in India vs 2.8-3m tonnes normally, and 5.1m tonnes in China vs 6-7m tonnes normally), we do not expect restocking to occur in a significant manner in the coming months.
- Given the higher CPO prices achieved in the first two months of 2017, we raise our CPO price forecast for 2017 to MYR2,600/tonne (from MYR2,500/tonne). However, we lower our price assumption for FY18 to MYR2,400 (from MYR2,500) to account for our expectation that prices would continue to be weak.
- We also adjusted our forecasts for higher PK and PKO prices and our latest in-house exchange rate assumptions.
- All in, our forecasts have been raised by 7.1% for FY17, but lowered by 3-5% for FY18-19.
- We reduce our TP for First Resources to SGD1.80 (from SGD1.90), based on a lowered 17x (from 19x) 2017 P/E. This implies an EV/ha of USD11,500/ha, in line with its peer range of USD10,000-15,000/ha.
- We believe valuations will moderate as CPO prices fall, given that the market is forward looking and more sensitive to CPO price movements than earnings.