DBS Vickers 2015-08-14: First Resources - 2Q15; Take advantage of recent sell-off. Upgrade to BUY.


Take advantage of recent sell-off 

  • 2Q15 earnings of US$28.6m were below our/consensus forecasts on annualised basis. S$0.0125 interim DPS declared 
  • Earnings were dragged by falls in Refining & Processing EBITDA and CPO ASP 
  • FY15F/16F earnings revised by -8%/-3% to adjust for lower forecast downstream volume, lower CPO ASP 
  • Upgrade to BUY with revised TP of S$2.04 (based on DCF) 

2Q15 earnings below. 

  • Reported 2Q15 earnings came in at US$28.6m (+10% y-o-y; +3% q-o-q) – taking 1H15 earnings to US$56.3m (-21% y-o-y) – representing 35% of our FY15 target (vs. 45% average historical). 
  • Underperformance was mainly due to lower-than-expected Refining & Processing EBITDA, which dropped 46% q-o-q (-95% y-o-y). This reflects weaker margins (vs. 2Q14) – given the drop in higher-margin biodiesel production YTD. 
  • A 12% sequential expansion in Plantations EBITDA to US$59.0m partially offset this – thanks to better-than-expected ASP (vs. domestic spot). 
  • 2Q15 top line expanded 6% y-o-y (23% q-o-q) to US$118.8m, driven by volume expansion in both Refinery & Processing (+26% yo-y; +196% q-o-q) and CPO sales (+29% y-o-y; +15% q-o-q). 

Output to decelerate in 2H15. 

  • Including smallholders, FR produced 632k MT of own FFB (+20% y-o-y) in 2Q15, which translated to FFB yield of 4.6MT/ha (+10% y-o-y; +10% q-o-q). We understand rainfall in Riau is currently below normal, and that 2H15 output growth should decelerate given 2H14’s high base. 
  • New estates plantings YTD (including smallholders) reached 3,816ha (representing 49% of our initial FY target of 8kha) – excluding newly acquired estates. The group is now guiding new planting of 5-7k ha this year. With this, we adjusted our FY15F new planting to 6k ha. 

Forecast, TP revised. 

  • We tweaked FY15F/16F earnings by -8%/-3% to account for lower projected biodiesel output (previously assumed to commence 1 Jul15), lower domestic ASP, and slightly higher tax rate while leaving our FFB and CPO production volumes unchanged. 
  • Our TP is likewise revised to S$2.04 (based on DCF); 

Rating upgraded to BUY. 

  • We recommend investors to accumulate FR on any near-term weakness, as we believe its current share price has more than reflected lower earnings prospects over the next 12 months. 
  • We expect CPO prices to recover next year on lower prospective soybean planted area, slower palm oil output growth, and ramp up of biodiesel offtake. Our TP implies 14% upside excluding 2% dividend yield.

Ben SANTOSO | http://www.dbsvickers.com/ DBS Securities 2015-08-14
BUY Upgrade HOLD 2.04 Down 2.11