First Resources - RHB Invest 2015-10-21: Upgrading CPO Prices On Strong El Nino

FIRST RESOURCES LIMITED EB5.SI

First Resources - Upgrading CPO Prices On Strong El Nino

We believe the El Nino’s impact on edible oil supply will be the largest ever given its current strength. As such, we are raising our CPO price estimate for 2016 to MYR2,700/tonne (from MYR2,500).
Our TP is lifted slightly to SGD2.69 (51% upside), based on 19x 2016 earnings.
No change to our BUY recommendation as First Resources remains our overall top plantation pick.

We believe the El Nino’s impact on edible oil supply will be the biggest ever given its strength and high global reliance on palm oil. In the last mild El Nino in 2009-2010, palm oil price went ballistic as production stagnated. Given that the current episode is a strong one and could match the 1997-1998 El Nino, the impact on production will be more severe with Indonesia potentially experiencing a production decline next year.
Unlike the last two episodes, there will be little or no mitigating factor from an increase in oil palm hectarage since Indonesia’s new planting has been slowing in the past few years.

First Resources recorded an impressive 15.1% increase in 9M15 nucleus production, with a marginal increase in FFB yield. Nevertheless, we have conservatively imputed an 11% increase for the year, falling to 8% in 2016 due to sub-optimal rainfall at its Riau estates.

We are raising our 2016 average CPO price assumption to MYR2,700/tonne from MYR2,500/tonne previously, while lifting 2017 average to MYR2,750/tonne from MYR2,600/tonne previously. Nevertheless, we reduce our FY16 earnings forecast by 12.8% as the increase in palm oil price is more than offset by the additional depreciation amounting to USD27.9m due to a change in accounting standards next year.
We introduce our FY17 earnings forecast at USD209m.

A MYR100/tonne rise in CPO price could boost FY16F earnings by 7.4% and FY17F earnings by 6.7%.

We expect CPO prices to rally throughout 2016, which will likely result in an expansion in P/E multiple. As such, we raise our target P/E to 19x from 16x previously, resulting in a higher TP of SGD2.69 (from SGD2.54).

Singapore Research RHB Research | http://www.rhbinvest.com.sg/ 2015-10-21

RHB Research SGX Stock Analyst Report BUY Maintain BUY 2.69 Up 2.54