First Resources - Benefit From Inventory Sales Amidst High Prices
- First Resources’ 1Q17 results came in strongly at 30-32% of our and consensus’ forecasts, as it benefitted from the higher sales of CPO inventory during the quarter and turnaround at its downstream division.
- The strong FFB output recovery and high CPO selling prices were also contributory factors. We leave our forecasts unchanged pending the analyst briefing later.
- Our TP of SGD1.80 (8% downside) also remains unchanged, based on 17x 2017F P/E and an EV/ha of USD11,500, in line with its peers.
- We believe the company is fairly valued at this juncture and maintain our NEUTRAL recommendation.
1Q17’s core net profit came in above expectations
- 1Q17’s core net profit came in above expectations, comprising 30-32% of our and consensus’ FY17 earnings. The main differences came from the better- than-expected downstream margins of 4% (vs our breakeven assumption) as well as sale of CPO inventory.
- First Resources drew down some 46,000 tonnes of CPO from its inventory (up from 9,000 tonnes in 1Q16) to sell in 1Q17, taking advantage of the high prices.
Strong recovery in FFB output in 1Q17, rising 42% YoY.
- However, output declined 18% QoQ, due to seasonality, coming off from the peak output period in 4Q16. The strong output growth is better than management’s guidance of a 15% YoY growth and our projected 14% YoY rise.
- Nevertheless, we believe that this growth would moderate going into 2H17, given that 1Q and 2Q of 2016 were very weak quarters for production, which created a low base effect. As such, we are leaving our FFB output forecasts unchanged at this juncture, pending management’s guidance at the analyst briefing today (12 May 2017).
CPO price rose 33.6% YoY.
- Its 1Q17 transacted CPO price of USD635/tonne 10 was 1% higher QoQ and 33.6% higher YoY.
- Although this is higher than our 8 projected USD584/tonne (ex-export tax) for FY17, we are leaving this unchanged at this juncture, given that CPO prices are on a declining trend currently. For every MYR100/tonne change in CPO price, we estimate its earnings would be impacted by 4-5% pa.
Downstream margins are back in the black in 1Q17.
- Its downstream division returned to profitability in 1Q17 on the back of higher selling prices (+37.2% YoY) and despite the high feedstock costs. It is possible downstream margins could stay in the positive territory going forward, given the rate of decline of PK and PKO prices recently.
- We leave our forecasts unchanged at this juncture, pending more details from the analyst briefing today.
- Our TP of SGD1.80 is based on 2017F P/E of 17x and EV/ha of USD11,500 is unchanged. This is in line with its peers, which trade in the USD10,000-15,000/ha range. Its large exposure to Riau (67%) puts it at risk in the face of weak weather-led productivity, while valuations look fair at current levels.