UOB Kay Hian Research 2015-07-23: First Resources - To Sustain Growth From Acquisition Of Planted Areas. Maintain BUY.

First Resources (FR SP) To Sustain Growth From Acquisition Of Planted Areas 


  • As FR is adopting more stringent sustainability practices, which will lead to slower new planting going forward, and in order to sustain its high production growth, FR has just announced the acquisition of a plantation company with operations in West Kalimantan which is located next to its existing estates. 
  • This acquisition comes with 6,000ha of young and immature areas with an estimated price of US$11,667/ha. 
  • We are positive on this acquisition. 
  • Maintain BUY. Target price: S$2.40. 


WHAT’S NEW 


  • First Resources (FR) has announced the acquisition of plantation company PT Falcon Agri Persada that has an oil palm plantation in West Kalimantan, which is adjacent to its current operations. 
  • The acquisition comes with 6,000ha of planted area and some unplanted landbank for a total consideration of US$70m or US$11,000/ha. 

• Positive move. 

  • We are positive on this acquisition. 
  • Even though it is just a small addition (4% of total planted) to FR, the acquisition of planted areas will allow FR to: 
    1. sustain its production growth as new planting will be slowing down significantly, 
    2. provide an immediate enhancement to production as 50% of the planted areas are in production age, and 
    3. purchased price is relatively low as compared with the recent deals in Kalimantan, Indonesia.


STOCK IMPACT 


• Further landbank expansion. 

  • FR will be acquiring about 6,000ha of nucleus planted area in West Kalimantan. This acquisition would increase FR's total nucleus planted area by 4% to 173,710ha. 
  • We understand that this parcel of land is located near FR's existing plantation estate in West Kalimantan. 
  • The close proximity between the areas would allow infrastructure and resources sharing and thus cost savings. 

• Good pricing for this acquisition which is strategically located to existing operations. 

  • FR is paying about US$11,667/planted ha for the acquisition. This acquisition price is deemed as good as compared with the recent acquisition in Kalimantan at US$16,400/ha. 
  • The most recent acquisition was Felda Global Ventures’ acquisition of a 37% stake in Eagle High Plantation, which was valued at EV/planted ha of US$17,400. 
  • This acquisition is expected to be funded internally. 

• Marginal earnings enhancement. 

  • Out of the 6,000ha of planted area, 50% are immature areas and another 50% are at the young mature stage. Thus, we expect marginal earnings enhancement of 0.5-1.0% for 2016-17 from this acquisition as profitability for young oil palm trees is low. 
  • Better earnings contribution would come as they move towards their prime age. 

• Strong 1H15 production. 

  • FR reported strong yoy nucleus FFB production growth of 13% (+4.4% yoy) in Jun 15, mainly supported by yield recovery for its Riau estates and an increase in new mature area. 
  • For 1H15, FFB production grew strongly at 18% yoy. This is above our expectation of 10% for full-year 2015. 
  • However, we are maintaining the growth assumption as 2H15 production yoy growth will affected by the higher base in 2H14. Also, Jul 15 production is likely to slow down before picking up again in Aug 15 due to the Raya holidays in Jul 15. 

• Rising third-party fruit. 

  • In 2Q15, FR’s third-party fruity intake increased significantly qoq by 27.3% mainly due to commissioning of a new mill at end-Mar 15. 
  • We believe that there would be more third-party fruit purchases in the 2H15 to increase the utilisation rate of the new mill. This could be the reason for the marginal decline in OER in 2Q15. 
  • Nevertheless, its OER rate is still one of the highest in the industry. 

• Focus on sustainability. 

  • On 1 Jul 15, FR made a pledge for sustainable development. Therefore, it is likely to see slower new planting from now onwards, in line with management’s earlier guidance. 
  • Management has guided new planting of 5,000- 10,000ha of new area in 2015, much lower than 24,000ha planted in 2014. 
  • Its 2015 new planting likely to be at the lower end of guidance. 
  • So far, it has planted about 1,984ha in 1Q15 (1Q14: 7,622ha). 

• Better 2Q15 results. 

  • We believe that its 2Q15 net profit would be better yoy and qoq (2Q14: US$29.7m, 1Q15: US$28.9m) supported by: 
    1. drawdown of built-up inventory of 20,000 tonnes in 1Q15, and 
    2. strong FFB production growth of 10.0% qoq (+19.9% yoy) that helped to mitigate the lower selling prices. 
  • Indonesia average CPO prices have declined by 5.5% qoq (-13.0% yoy). 
  • Although demand for refined products is likely to pick up in 2Q15 likely due to higher seasonal demand from the Hari Raya festival, thin refining margin would continue to affect its EBITDA contribution. 


EARNINGS REVISION/RISK 


• No change to our earnings forecasts. 


VALUATION/RECOMMENDATION 


• Maintain BUY with a target price of S$2.40 based on 15x 2016F. 

  • We like FR because it is a beneficiary of Indonesia’s new export levy and biodiesel policies, and it also has a good track record of delivering better-than-industry FFB yield and OER. 

• In the event of El Nino, its sector valuation would usually expand closer to 1SD above its mean valuation. 

  • Based on a re-rated valuation, the implied target price is S$3.19, and there will be 46% of potential upside to FR’s share price. 


SHARE PRICE CATALYST 


  • Rally in CPO price. 
  • Value-enhancing acquisitions to expand planted areas given that new planting is getting tougher given the more stringent requirements to comply with sustainability standards. 
  • Sustainability of better-than-peers’ downstream margin. 


(Chan Yuan She)

Source: http://research.uobkayhian.com/




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