First Resources (FR SP) - 1Q17 Strong Performance, Supported By Better CPO Prices
- FR reported core net profit of US$46m in 1Q17, slightly above our expectation, mainly attributed to stronger-than-expected realised palm kernel (PK) prices and higher CPO sales volume from an inventory drawdown.
- The strong qoq and yoy performances were due to higher CPO and PK prices.
- We maintain our earnings estimates as we expect weaker earnings in the coming quarters due to weakening CPO prices.
- Maintain BUY. Target price: S$2.15.
Strong 1Q17 results, slightly above expectations.
- First Resources (FR) reported core net profit of US$46m (-4.4% qoq, +>100% yoy) in 1Q17, slightly above our expectation of US$42m.
- The positive variance was mainly attributed to stronger realised palm kernel (PK) prices and higher sales volume from an inventory drawdown.
- 1Q17 core net profit accounts for 32% of our 2017 forecast.
Strongest 1Q in past three years.
- The significant yoy improvement in 1Q17 net profit was mainly supported by higher production and the jump in CPO prices. The marginal qoq drop was mainly due to weaker production on seasonality despite better CPO prices.
- The division reported a > 100% yoy surge in EBITDA (-29.1% qoq), mainly due to higher selling prices and higher sales volume.
- CPO ASP jumped 33.6% yoy (+1.0% qoq) and sales volume rose 8.5% yoy on the back of a recovery in CPO production.
Refinery and processing.
- The division registered qoq and yoy increases in EBITDA on better EBITDA margin of US$37/tonne in 1Q17 (4Q16: negative margins, 1Q16: US$16/tonne).
- The improved margins were partly due to the timely purchases of raw materials, sales of refined products and product mix, including the sales RBD olein, palm kernel oil and palm kernel expeller.
Maintain FFB production growth of 18% yoy for 2017.
- We are maintaining our FFB production growth of 18% yoy for 2017, mainly supported by a yield recovery and new areas coming into maturity. There will be 17,000ha of new areas coming into maturity in 2017 (10.7% of 2016 mature area), which should provide about 3% FFB production growth for 2017. Our forecast is higher than management’s guidance of 15% yoy.
- We deem management’s guidance very conservative, given that West Kalimantan’s production is expected to show good FFB yield (less impacted by the 2015 El Nino and have younger trees).
Maintain net profit forecasts.
- We forecast EPS of 9.1 US cents, 9.5 US cents and 9.9 US cents for 2017-19 respectively.
- We are maintaining our earnings forecasts as we expect weaker earnings in the coming quarters due to weakening CPO prices despite a production recovery. We also await outlook guidance from management during the conference call.
- Maintain BUY and target price of S$2.15, based on 17x 2017F PE, or its 5-year mean PE.
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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 earnings.
Stronger-than-expected FFB production.
- Stronger-than-expected production recovery will positively contribute to FR’s earnings.