UOB Kay Hian 2015-08-14: First Resources - 2Q15: Better Performance From Upstream Operation. Maintain BUY.

FIRST RESOURCES LIMITED EB5.SI

2Q15: Better Performance From Upstream Operation

2Q15 results were within expectations, with better-than-expected performance from upstream mitigating weaker downstream operation.
Upstream production did well in 1H15 and management raised production growth guidance to 10-15% (from 5-10%).
Downstream EBITDA margin declined on the absence of higher-margin biodiesel contracts while biodiesel demand from the mandate in Indonesia has yet to come.
Maintain BUY. Target price: S$2.40.

First Resources (FR) reported 2Q15 core net profit of US$30.3m (+4.9% qoq, +1.9% yoy).
1H15 core net profit of US$59.2m (-19.4% yoy) was 41.1% of our full-year estimate and 36% of consensus’. Results were within our expectation with better-than-expected performance from the plantation division mitigating the weaker contributions from the refining and processing division.
Strong performance from plantation division. FR reported qoq and yoy growth in EBITDA, boosted by higher sales volume (+15.4% qoq, +28.6% yoy) on strong FFB production (+10.0% qoq, +19.9% yoy) and inventory drawdown. This helped mitigate the weaker CPO prices during the quarter (-5.8% qoq, -15.5% yoy). For 1H15, EBITDA rose 2.9% yoy, supported by higher sales volume and lower cost due to lower third-party purchases (-4.2% yoy).
Sharp decline in EBITDA in the refining and processing division. EBITDA declined 45.6% qoq (-94.8% yoy) in 2Q15 as EBITDA margin dropped to US$6.5/tonne (-81.6% qoq, -95.9% yoy) despite much higher sales volume (+>100% qoq, +25.6% yoy). The decline in margin is likely due to the absence of higher-margin biodiesel sales. FR has increased utilisation at the processing plant to produce more refined products due to the positive refining margins in 2Q15.
FR declared an interim dividend of 1.25 S cent/share, similar as in 2Q14.

FR reported a strong nucleus production growth of 18.1% yoy and the strong momentum is expected into 2H15, supported by higher yield from its Riau estates and an increase in new mature area. Its Riau estates suffered from tree stress in 2013 and yield recovery was delayed from 2014 to 2015. With the stronger performance from Riau, management is now guiding for a higher production growth of 10- 15% yoy for 2015 (from 5-10% yoy). Hence, we also lift our production growth forecast from 10% to 13% for 2015.

FR had a net inventory build-up of 22,000 tonnes in 1H15 (vs a net drawdown of 4,000 tonnes in 1H14) that is expected to be drawn down in 3Q15 due to the timing of shipments. We believe this will help boost its performance in 3Q15.

With the absence of discretionary biodiesel demand and pending the implementation of the biodiesel mandate in Indonesia, FR will focus more on refining operations if there is positive refining margin. Although the export levy was only implemented on 16 Jul 15, the market has factored in the export levy into t domestic prices. This has partly resulted in the positive refining margin during the quarter. The export levy will help boost FR’s downstream margin as there will be about a US$20/tonne spread arising from the difference in the export levy between CPO (US$50/tonne) and processed oil (US$30/tonne).

On 1 Jul 15, FR introduced a sustainable palm oil policy for sustainable development. Therefore, it is likely to see slower new planting from now onwards. Management has guided new planting of 5,000-7,000ha in 2015 (from 5,000- 10,000ha). So far, it has planted 4,127ha in 1H15 (1H14: 13,325ha). To make up for the slower new planting, FR embarked on landbank acquisition. In Jul 15, FR announced the acquisition of 6,000ha of planted landbank in Kalimantan with an average age of 3 years old. This will be accounted into FR’s book starting 3Q15.

We reduce our net profit forecast for 2015 by 7% to factor in:
1. lower EBITDA margin for the refining and processing division, and
2. higher FFB production growth of 10-15% (8- 10% previously), in line with management guidance.
We are now expecting EPS of 8.5 US cents, 11.5 US cents, and 12.7 US cents for 2015- 17 respectively.
We are aware of the change in the accounting standard on the treatment of biological assets, which will affect FR’s book value and have a one-off impact on its 2016 earnings. We have yet to incorporate this into our earnings forecasts.

Maintain BUY with a lower target price of S$2.40, based on 15x 2016F PE. We like FR as it is a beneficiary of Indonesia’s new export levy and biodiesel policies. It also has a good track record of delivering better-than-industry FFB yield and OER.

Chan Yuan She | Singapore Research Team | http://research.uobkayhian.com/ UOB KH 2015-08-14

BUY Maintain BUY 2.40 Down