First Resources Ltd - CIMB Research 2016-02-25: Weak 4Q due to higher costs and taxes

First Resources Ltd - CIMB Research 2016-02-25: Weak 4Q due to higher costs and taxes FIRST RESOURCES LIMITED EB5.SI 

First Resources Ltd - Weak 4Q due to higher costs and taxes 

  • Final results below due to higher-than-expected costs and effective tax rate. 
  • Losses from the downstream division also contributed to the weak 4Q results. 
  • The group projects a flat to 5% yoy drop in FFB output for FY16. 
  • It expects CPO price to trend higher and targets new planting rate of 4k ha. 
  • Cut earnings to reflect lower output and target price reduced to S$2.1. Maintain Add. 

■ Final results below due to higher costs and downstream losses 

  • First Resources’ FY15 core net profit was below, making up only 80% of our and consensus full-year forecasts. 
  • The weaker-than-expected earnings were due to higher fertiliser costs, a net inventory build-up of 70,000 tonnes of palm products, US$2m losses from the downstream business in 4Q, and higher-than-effective tax rate of 31% for FY15. 

■ Weak 4Q due to lower palm products prices and higher tax rate 

  • The group’s 4Q15/FY15 net profit fell 67%/38% yoy due to lower plantation earnings and higher effective tax rate. 
  • Plantation EBITDA fell 45%/23% yoy in 4Q15/FY15 as lower CPO prices trumped higher FFB output. 
  • ASP achieved for CPO fell 28%/21% yoy to US$464/US$541 per tonne in 4Q15/FY15. 

■ FFB production in line but costs higher than expected 

  • 4Q15/FY15 FFB output jumped 13%/15% yoy, respectively, on better FFB yield achievement and new mature areas. These were in line with the group’s guidance of 10- 15% output growth and our forecast of 15% for 2015. 
  • However, plantation EBIT came in below due higher fertiliser costs and a net inventory build-up of 70,000 tonnes in 4Q15. 

■ Downstream sinks into the red in 4Q15 

  • Refining and processing posted a loss of US$2m in 4Q, thus reducing full-year profit to US$14.6m (-55% yoy) due to weak refining margins. 
  • We expect the profitability of this business to improve in 2016 due to higher biodiesel sales and margins. 
  • The effective tax rate was above in 4Q due to withholding tax effects and non-tax deductible expenses. 

■ Surprised by low output guidance for 2016 

  • The group indicated that its FFB output could be flat or 5% lower in 2016, as the poor weather and haze experienced at its estates in 2015 are expected to reduce FFB yields. This, coupled with higher labour costs of 6-7%, is expected to raise the group’s cost of production for CPO by 8% to around US$220/tonne in 2016. New planting rate for 2016 will decline to 4,000 ha from 6,000 ha achieved in 2015. 

■ Cutting earnings forecasts and target price 

  • We lower our FY16-17F earnings forecasts by 12-21% mainly to reflect lower output assumptions and a higher effective tax rate. This leads to a 12% cut in our target price to S$2.10 (still based on FY17 P/E of 13x). 
  • We maintain our Add call despite the disappointing earnings as we like the group’s estates’ young age profiles (56% of planted estates below 7 years old). 
  • Key re-rating catalysts are rising CPO price and better-than-expected FFB yields.

Ivy NG Lee Fang CFA CIMB Securities | 2016-02-25
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 2.10 Same 2.38