First Resources - UOB Kay Hian 2015-11-16: 3Q15 Within Expectations; Posts A Strong Downstream Margin

First Resources - UOB Kay Hian 2015-11-16: 3Q15 Within Expectations; Posts A Strong Downstream Margin FIRST RESOURCES LIMITED EB5.SI 

First Resources (FR SP) - 3Q15: Within Expectations; Posts A Strong Downstream Margin 

  • FR reported in-line 3Q15 results and better performance from its downstream operations. Upstream sales volume weakened in 3Q15 due to a delay in shipments. 
  • Downstream EBITDA margin was US$104.70/tonne, at its highest since 4Q13 thanks to good timing in sales and purchases. 
  • We expect good downstream margins on a wider price spread between spot and future prices, and the recent biodiesel contract win. 
  • Maintain BUY. Target price: S$2.40. 


RESULTS 


Better set of qoq results. 

  • First Resources (FR) reported 3Q15 net profit of US$31.7m (+10.8% qoq, -26.4% yoy). Excluding the forex translation loss and non-recurring income, core net profit was US$35.0m (+17.7% qoq, -21.2% yoy). 
  • For 9M15, core net profit came in at US$93.7m (-20.5% yoy). Results were in line with our expectation with the refining division posting a better performance. This helped mitigate the weaker contributions from the plantation division. 
  • We are expecting better 4Q15 earnings on the back of: 
    1. higher sales volume from the plantation division, 
    2. better CPO prices and 
    3. larger contribution from biodiesel. 
  • Historically, the fourth quarter contributes to an average of 31% of full-year earnings. 


STOCK IMPACT 


• Plantation division’s performance slightly below expectation. 

  • This division posted lower qoq and yoy growth in EBITDA due to weaker sales volume (-4.1% qoq, -11.6% yoy) caused by a delay in deliveries. In 9M15, EBITDA contracted 13.5% yoy on lower sales volume and softer CPO ASP. 

• A surge in refining and processing division’s EBITDA margin. 

  • This division reported EBITDA of US$14.4m in 3Q15 (+100.0% qoq, +58.6% yoy). This was boosted by a much higher EBITDA margin of US$104.7/tonne due to the good timing in the execution of sales and purchases. However, this trend is not likely to be sustainable. 
  • Meanwhile, we still expect a good margin in 4Q15 due to the wider price spreads between spot and future prices which is likely to benefit refiners and the better margins from the sale of biodiesel to Pertamina. 

• Lower production in 4Q15. 

  • Fresh fruit bunch (FFB) production reached 2.06m tonnes in 9M15. We are expecting to see weaker production in 4Q15 due to lower FFB yield on seasonality and the impact from the recent dry spell. Nevertheless, sales volume is expected to be good, supported by the inventory drawdown. There was a net inventory build-up of 70,000 tonnes in 3Q15 due to the delay in scheduled shipments. We believe these inventories will be drawn down in 4Q15 and help boost its performance in the quarter. 

• Supply to Pertamina. 

  • FR won a supply contract for biodiesel from Pertamina recently. The company is looking to supply 73,000 tonnes of biodiesel in the period of Nov 15 to Apr 16. Its downstream operations accounted for about 10.2% of its 9M15 total EBITDA contributions. 


EARNINGS REVISION/RISK 

  • We revised our net profit forecast upwards for 2016-17 by 2.4% and 14.2% respectively to factor in: 
    • Higher CPO price assumptions of RM2,500 for 2016 and RM2,600 for 2017. 
    • Lower FFB production growth of 9.4% for 2016 from 15.5% to factor in the impact from the recent dry weather conditions. However, we believe FR’s production will see a lower impact as its prime tree age areas are less affected this time round. 
    • Higher depreciation to reflect the accounting treatment of biological assets with the amendments to International Accounting Standard (IAS) 41. 
  • The impact from higher CPO prices was offset by lower production and higher depreciation. We are now expecting an EPS of 8.5 US cents, 11.7 US cents, and 14.4 US cents for 2015- 17 respectively. 


VALUATION/RECOMMENDATION 

  • Maintain BUY and 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 oil extraction rate (OER). 


SHARE PRICE CATALYST 

  • Rally in CPO prices. 
  • Sustainability of better-than-peers’ downstream margin.



Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.40 Same 2.40


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