First Resources - RHB Invest 2015-12-02: Top Pick For The Plantation Sector

FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Top Pick For The Plantation Sector

We believe El Nino’s impact on edible oil supply is likely to be one of the largest ever, given its current strength, and, as such, are raising our CPO price estimate to MYR2,700/tonne for 2016 (from MYR2,500).
There is no change to our BUY recommendation on this counter, as it remains our overall plantation Top Pick.
Our TP is at SGD2.69 (35% upside), based on 19x 2016F earnings.

We believe El Nino’s impact on edible oil supply is likely to be its biggest ever, given its strength and high global reliance on palm oil.
In the last mild El Nino in 2009-2010, palm oil prices went ballistic as production stagnated. Given that the current episode is a strong one and could match the El Nino of 1997-1998, the impact on production would be more severe – with Indonesia potentially experiencing a decline in production next year.
Unlike the last two episodes, there would be little or no mitigating factors from an increase in oil palm hectarage. This is because 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 2017’s average is raised to MYR2,750/tonne from MYR2,600/tonne previously.
Our FY16F earnings are, nevertheless, trimmed by 12.8% as the increase in palm oil price is more than offset by the additional depreciation amounting to USD27.9m. This is due to a change in accounting standards next year.
We introduce our FY17F earnings at USD209m.

A MYR100/tonne rise in CPO price is likely to boost First Resources’ FY16 earnings by 7.4% and FY17’s by 6.7%.

We expect CPO prices to rally throughout 2016, which would likely result in an expansion in P/E multiples.
As such, we have raised our target P/E for First Resources to 19x from 16x previously, resulting in a TP of SGD2.69.

Singapore Research RHB Research | http://www.rhbinvest.com.sg/ 2015-12-02

RHB Research SGX Stock Analyst Report BUY Maintain BUY 2.69 Same 2.69