First Resources (FR SP) - UOB Kay Hian 2017-07-20: Expects Strong CPO Production In 2H17

First Resources (FR SP) - UOB Kay Hian 2017-07-20: Expects Strong CPO Production In 2H17 FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Expects Strong CPO Production In 2H17

  • Our visit to First Resources (FR)’s estate in Pekanbaru reaffirms our positive view of FR’s good estate management and practices. We are impressed with its R&D centre, seed production and learning centre, which is an indication of its commitment to sustainable growth within the group. 
  • We saw a lot of FFB on the trees - an indication of good harvest in 2H17. Female flower ratio has improved for a good production in 2018. 
  • Maintain HOLD. Target price: S$1.95. Entry price: S$1.75.



WHAT’S NEW

  • We visited First Resources’ (FR) estates and its Research and Learning Centre in Pekanbaru, Indonesia. The estate is about 4,400ha and about 16 years old. 
  • We had a fruitful visit and remain positive on FR’s longer-term outlook. However, we gather that 2Q17 results are likely to be weaker qoq on weaker production due to the 20-24 months impact from El Nino. 
  • We maintain our earnings forecast and expect EPS growth of 54% yoy for 2017 on the back of FFB production growth of 18% yoy and stronger CPO price assumption of RM2,600/tonne (+8% yoy).

Yield to improve yoy in 2017-18. 

  • We understand that the lagged impact from the severe drought in 2015 is weakening, while FFB yield is recovering. Management is expecting FFB yield for its Pekanbaru estates to improve 13% yoy in 2017. 
  • With the good estate management, we gather that FFB yield for a small plot in the estates is expected to hit 30 tonne/ha in 2017. 
  • Nevertheless, we are expecting the FFB yield for the group to be lower, growing 8% yoy in 2017, as the yield recovery could be diluted by older trees.

FFB production to peak in Oct-Nov 17. 

  • During our site visit, we saw 4-8 fresh fruit bunches (FFB) growing on the trees which are ready for harvesting in the next 5-6 months. Thus, we are confident of a strong FFB production recovery in 2H17. 
  • The FFB production ratio for 1H:2H is expected at 46%:54% for 2017, while FFB production is likely to peak in Oct-Nov 17.

Weaker qoq results but better yoy performance in 2Q17. 

  • 2Q17 earnings could likely be weaker qoq but better yoy. We forecast 2Q17 core net profit of US$29m-33m (1Q17: US$46m, 2Q16: US$25m). 
  • We gather that FFB production was flat mom in Apr-May 17, and marginally weaker mom in Jun 17 on fewer harvesting days due to the Hari Raya holidays. Refining volume could also be lower qoq due to lower biodiesel sales to Pertamina. However, this will partly be mitigated by better refining margins qoq.
  • Meanwhile, the better yoy performance would mainly be supported by the recovery in FFB production and positive refining margins yoy (negative in 2Q16).


STOCK IMPACT


Maintains FFB production growth for 2017. 

  • We maintain our FFB production growth of 18% yoy for 2017, mainly supported by a yield recovery and new areas coming into maturity. We are expecting FFB yield to rise 8% yoy in 2017, driven by the estates in Sumatra and West Kalimantan. 
  • Meanwhile, 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 FFB production growth 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).

More female flowers indicate better production in 2018. 

  • During the site visit, we note the female-to-male flower ratio has improved to 65-70%:35-30% in 2017 from 45:55% in 2016 on the back of less-stressed trees as rainfall has been good. This indicates good production in 2018. We are expecting FFB production growth of 19% yoy for 2018.

Well-maintained mill. 

  • The mill is about 9 years old. We are impressed by the cleanliness of the mill. We understand that the OER for 2017 will be slightly below 2016’s, mainly due to a drop in the quality of FFB crop and higher rainfall. 
  • All in all, we expect higher CPO production on the back of better FFB yield despite a marginal drop in OER.

Ventures into seed production. 

  • We visited FR’s 45-ha seed garden which is located near to the research and learning centre. The investment in seed production is in early stage. Meanwhile, the seeds produced are only for internal use.

Labour shortage is still manageable. 

  • We note that Indonesia’s plantation companies are more labour intensive vs Malaysia’s plantation companies. We believe this could be due to the ease in recruiting workers in Indonesia than in Malaysia. 
  • We note that FR’s mill operations are largely manual, hence requiring more workers. Meanwhile, we understand that the labour shortage in Sumatra is not as severe as in Kalimantan.

Learning centre ensures talent sustainability. 

  • FR employs fresh graduates from local universities and these new staff has to undergo a talent training programme which consists of three months of intensive classroom training and three months of on-the-job training. The programme ensures the sustainability of its workforce. FR recruits 100-150 fresh graduates to participate in the talent training programme each year with a retention rate of about 80%. 
  • FR has two more learning centres in Kalimantan.


EARNINGS REVISION/RISK


Maintain net profit forecasts. 

  • We forecast EPS of 9.1 US cents, 8.7 US cents and 9.9 US cents for 2017-19 respectively
  • The weaker earnings estimate for 2018 is mainly due to expected significantly weaker CPO prices going into 2018 as supply outweighs demand. We forecast CPO prices to average RM2,400/tonne (-8% yoy) for 2018.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of S$1.95, based on 16x 2018F PE, or its 5-year mean PE. Entry price is S$1.75.


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 contribute to FR’s earnings.




Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-20
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.950 Same 1.950



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