First Resources Ltd - CIMB Research 2016-02-25: Weak 4Q due to higher costs and taxes | SG Investors.io

-->

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 | http://research.itradecimb.com/ 2016-02-25

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 2.10 Same 2.38