CIMB Securities 2015-08-14: First Resources Limited - 2Q15; Stronger output but… Maintain ADD.

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Stronger output but… 

• First Resources’ 1H15 core net profit was in line with our expectations at 45% of our full-year forecast, but below consensus at only 36% of theirs. 
• Interim core net profit fell 21% due to lower downstream earnings, higher effective tax and inventory level. 
• We project a higher 2H profit driven by higher CPO sales volumes and lower fertiliser costs. 
• We cut earnings forecasts for FY16-17 by 8-11% to reflect higher depreciation charges following the adoption of accounting policy changes for biological assets in 2016. 
• This lowers our target price to S$2.23 (based on its historical average P/E of 15.3x). 
• However, our Add rating is intact due to its strong growth potential. 

Stronger output lifts 2Q15 

• First Resources’ 2Q15 core net profit grew 9% yoy as higher contributions from the plantation division more than offset weaker downstream earnings. 
• Plantation EBITDA rose 33% yoy in 2Q15 and 3% yoy in 1H15 as higher sales volumes trumped lower output. 
• ASP achieved for CPO fell 16% yoy to US$593/ tonne in 2Q, in line with the average CPO price in Belawan of US$612/tonne. 
• 2Q15 and 1H15 FFB output jumped 20% yoy and 18% yoy, respectively, on better FFB yield achievement from its Riau estates. 
• The 2Q earnings would have been higher if not for a net inventory build-up of 22,000 tonnes of palm products in 1H15 vs. a net drawdown of 4,000 tonnes in 1H14. 
• Refining and processing earnings fell 88% in 1H15 as the group slowed processing activities in view of the weak margins. 
• It also declared a 1.25 Scts interim dividend. 

Key takeaways from conference call 

• The group raised its guidance for FFB output growth from 5-10% to 10-15% for 2015, due to the better-than-expected FFB yield in 1H15. 
• However, it cut its new planting plans to 5k-7k ha, from 5k-10k ha previously, following the adoption of a more stringent sustainable palm oil policy. 
• It achieved 4,127 ha of new plantings in 1H15. 
• The group is bearish on near-term CPO prices due to subdued demand and lower crude oil prices. It revealed that the changes to IAS 41 will raise its depreciation charges but did not disclose the earnings impact. 

Recent price correction has priced in IAS 41 impact 

• We lower our earnings estimates as we estimate IAS41 could raise the group’s depreciation charges by US$20m. 
• We think recent price corrections have priced in this concern, and maintain our Add rating for First Resources’ favourable estate profile, cost efficiency and attractive valuations.

Ivy NG Lee Fang CFA | http://research.itradecimb.com/ CIMB Securities 2015-08-14

ADD Maintain ADD 2.23 Down 2.44