First Resources (FR SP) - UOB Kay Hian 2017-05-02: Expect A Satisfying 1Q17

First Resources (FR SP) - UOB Kay Hian 2017-05-02: Expect A Satisfying 1Q17 FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Expect A Satisfying 1Q17

  • First Resources (FR) reported a record-high 1Q FFB production in 1Q17 on the back of a yield recovery and supported by new mature areas.  FFB nucleus production decreased 18.5% qoq on seasonality but improved significantly yoy. 
  • We are expecting weaker 1Q17 qoq earnings due to weak production and a sharp decline in palm kernel prices, but a better yoy performance on stronger FFB production and a jump in CPO prices. 
  • Maintain BUY. Target price: S$2.15.



WHAT’S NEW


1Q17 FFB nucleus production within expectations. 

  • First Resources (FR) reported FFB nucleus production of 624,688 tonnes in 1Q17, which was its strongest 1Q production, supported by a recovery of FFB yields and new mature areas. There are 17,000ha of new areas coming into maturity in 2017 (10.7% of 2016 mature areas). 
  • 1Q17 production accounts for 22% of our full-year estimate, and the highest in 1Q10-1Q16 (at 18.6-21.4% of full-year production). However, the production number is within our expectation as we see weaker 2Q17 production due to the 20-24 months impact from El Nino. 
  • Meanwhile, the normalisation in FFB production is expected to come in 4Q17.



STOCK IMPACT


Expect weaker qoq performance but significantly stronger yoy performance. 

  • We forecast 1Q17 core net profit of US$37m-42m (4Q16: US$48.1m, 1Q16: US$5.9m). We expect a weaker qoq performance due to the drop in FFB nucleus production (-18.5% qoq) as 1Q is a seasonally weaker quarter as well as the sharp decline in palm kernel (PK) prices, but partly mitigated by better CPO prices in 1Q17. 
  • The expected significantly yoy performance will be on the back of a recovery in FFB production, stronger CPO prices and better contribution from downstream operations on better refining margins. 
  • FR is targeting to release its 1Q17 results on 11 May 17 after market close.

Expect stable downstream operations in 1Q17. 

  • We expecting stable refining earnings in 1Q17 (likely to rise yoy but potentially lower qoq). 
  • Refining volume is expected to have been higher yoy on the back of more feedstock available in the market compared to 1Q16, but lower qoq on seasonality. Refining margin is also expected to be better yoy but lower qoq. Moreover, refining volume will be supported by contributions from the sales of biodiesel to Pertamina. 
  • Meanwhile, the announcement of the fourth biodiesel programme (May-Oct 17) has been deferred and this could due to the potential adjustment of the biodiesel pricing formula from US$125/tonne to US$100/tonne. 
  • Based on our channel checks, despite the deferment, the supply of biodiesel volume remains the same for now until the new contract is announced.

Lower qoq CPO production but higher yoy, in line with the trend of FFB production. 

  • CPO production decreased 21.6% qoq but rose 33.9% yoy in 1Q17. The yoy increase in CPO production was lower than FFB production (+43.7% yoy) mainly due to decline in OER to 22.4% in 1Q17 (1Q16: 23.0%).

Expect higher CPO prices qoq and yoy for 1Q17. 

  • Indonesia Dumai/Belawan CPO prices inched up 4.0% qoq but jumped 24.2% yoy in 1Q17. The substantial yoy increase was mainly due to tight supply, and stable export demand and domestic consumption.

Performance could be affected by sharp decline in PK prices. 

  • PK prices dived from a high of US$896/tonne on 24 Jan 17 to a low of US$422/tonne on 18 Apr 17, down 53.2%. The decline could drag FR’s 1Q17 results.

Maintain FFB production growth of 18% yoy for 2017. 

  • We are maintaining our FFB production growth of 18% yoy for 2017, which is higher than mangement’s guidance of 15% yoy. 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). 
  • In 1Q17, we note that nucleus FFB production came in higher than 2015’s production level despite FFB yield staying the same at 4.0 tonne/ha. This will also be supported by 17,000ha of new areas coming into maturity (10.7% of 2016 mature area), which should provide about 3% FFB production growth for 2017. 
  • Management also said the younger areas could see potential FFB yield as in 2015 but FFB yields for older trees are unlikely to recover that fast, ie, will still be below 2015 yield.


EARNINGS REVISION/RISK

  • 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.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$2.15, based on 17x 2017F PE, or its 5-year mean PE.


SHARE PRICE CATALYST


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.




Ooi Mong Huey UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-02
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.150 Same 2.150



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