Plantation - UOB Kay Hian 2016-01-28: 4Q15 Results Preview ~ Expect Mixed Set Of Results

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Plantation Sector FIRST RESOURCES LIMITED EB5.SI  BUMITAMA AGRI LTD P8Z.SI 

Plantation – Singapore 4Q15 Results Preview: Expect Mixed Set Of Results 

• BAL and FR registered better-than-industry CPO production growth in 2015 supported by young tree age and higher external crop intake. 
• We expect BAL (BUMITAMA AGRI LTD. P8Z.SI) to deliver better qoq results for 4Q15, supported by double-digit CPO production growth. 
• However, FR (FIRST RESOURCES LIMITED EB5.SI) is likely to report weak qoq results mainly due to seasonally weaker FFB production in 4Q15 and lower CPO ASP. This will partly be offset by inventory drawdown and good refining margin. 
• Maintain OVERWEIGHT. 

WHAT’S NEW 

 Better-than-industry CPO production growth. 

• For 2015, First Resources (FR) and Bumitama Agri (BAL) reported CPO production growth of 8.9% yoy and 20.1% yoy respectively, which is better than Indonesia’s CPO production growth of 3.2% yoy. The CPO production growth for BAL and FR was mainly supported by: a) higher external crop intake, and b) young tree age profiles which led to higher fresh fruit bunch (FFB) production growth. 

 Expect mixed set of 4Q15 results. 

• We are expecting better qoq results from BAL and weaker qoq results from FR in 4Q15. 

 BAL is expected to meet our 2015 earnings expectation of Rp987m. 

• The company’s 4Q15 net profit is expected to be in the range of Rp300b-330b (flat yoy, +35-45% qoq). 
• The stronger qoq performance is likely to have been driven by higher CPO sales (higher 4Q15 production and inventory drawdown), lower costs and the slight qoq improvement in CPO ASP). 
• On a yoy basis, the higher production should be offset by a significantly lower ASP. 
• Also, starting 3Q15, BAL began to recognise earnings from the sale of biodiesel. 
• BAL secured a biodiesel supply contract from Pertamina to supply 20,078 tonnes of biodiesel from Nov 15 to Apr 16. 

 FR’s full-year earnings might slightly be lower than our expectation of US$134.2m on lower-than-expected CPO production. 

• Full-year CPO production was 4.5% lower than our expectation because: 
  1. FR processed less third-party fruits, and 
  2. its oil extraction ratio (OER) was lower than expected. 
• We are expecting FR to report 4Q15 net profit of US$50m-60m. 
• Although FR’s earnings could fall below our expectation by 10-15%, it is still our preferred pick, given its flexible business model which allows it to capture the best value between upstream and downstream operations. If there is any positive earnings surprise, it would likely come from its downstream margin. 
• FR should be able to capture opportunities arising from the unusually wide price spreads between spot and futures in 4Q15. This could translate to higher downstream margins. 

ACTION 

 Maintain OVERWEIGHT. 

• We expect CPO prices to trend higher in 2016 as the inventory drawdown is likely to be fast-paced entering 1Q16. 
• Palm oil production in Malaysia and Indonesia is expected to slow down substantially on seasonally low production and the lagged impact from the dry season. 
• Moreover, the commitment from these two major palm oil producing countries to increase domestic biodiesel blend will increase demand and lower inventory levels 

 Top picks. 

• In the current conditions, we like FR (FR SP/Target: S$2.40) and BAL (BAL SP/Target: S$1.10) for their younger tree age profiles and exposure to Indonesia’s downstream operations

Regional Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-28

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