First Resources - UOB Kay Hian 2016-02-26: 2015 Below Expectations; 2016 Will Be A Better Year

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FIRST RESOURCES LIMITED EB5.SI 

First Resources (FR SP) 2015: Below Expectations; 2016 Will Be A Better Year 

• 2015 core profit of US$109m is below our and market expectations. 
• Variances came from a higher effective tax rate and a small loss from downstream operation in 4Q15. 
• We have adjusted our 2016 net profit forecast down by 29% on lower production growth and a higher effective tax rate, in line with management guidance. 
• Maintain BUY despite the earnings adjustment as FR is still an efficient producer with a relatively low cost of production and could see a turnaround in its downstream operations. 
• Target price: S$2.00. 

RESULTS. 

 First Resources (FR) reported 4Q15 net profit of US$19.8m (-37.5% qoq, -66.5% yoy). 

• Excluding the losses arising from the changes of fair value in biological assets, core net profit was US$21.3m (+-39.1% qoq, -62.3% yoy) for 4Q15, bringing full-year core net profit to US$109.3m (-36.3% yoy). 

 Results came in below our and market expectations. 

• In our preview note, we did mention that FR is likely to report results that are 10-15% below our forecast. However, the reported number came in even lower at about 20% below our expectation. The negative variance came from: 
  1. a surprise loss reported by the downstream division in 4Q15, 
  2. higher effective tax rate, and 
  3. as mentioned in our preview note, lower-than-expected production. 

 Plantation division improved qoq. 

• This division registered better qoq revenue growth of 9.2% mainly due to higher sales volume which was partly supported by inventory drawdown in 4Q15. 
• Nevertheless, EBITDA contracted 16.0% qoq and 44.6% yoy for 4Q15 and 22.6% for 2015 on lower CPO ASP. This was partly offset by the higher nucleus FFB production (+14.4% yoy) in 2015 on the back of improved FFB yield. 

 Refining and processing division turned to the red. 

• This division reported a loss of US$2.0m at EBITDA level in 4Q15, catching us by surprise given that FR has a good track record of delivering better-than-peers’ margins in the past. 
• Management attributes the loss to the poor timing of purchasing raw materials and also a higher inventory level as at end-15. The loss was mainly due to lower sales volume as margin was thin. 
• For 2015, EBITDA dipped by 55.3% to US$14.6m. 

 FR proposed a final dividend of 1.25 S cents/share, bringing the total dividend to 2.50 S cents/share. 

• This translates to a dividend yield of 1.3%. 

STOCK IMPACT 

 Revise down FFB production growth to flat for 2016, CPO production growth still positive. 

• We have revised down our nucleus FFB production growth to 0% from 9% previously. Our previous forecast on production growth looks too aggressive now as we have underestimated the dry impact on its older tree profile in Central Sumatra, which contributes about 80% of its total production. 
• Production from Central Sumatra is likely to contract in 2016 but this is expected to be mitigated by the younger areas in West and East Kalimantan. Management is guiding production growth of -5% to 0%, but we view this guidance as being too conservative. 
• CPO production is expected to grow in 2016 with higher third-party FFB purchase. Lower production from its own estates and a new mill coming into operation will lead to higher third-party FFB purchases to maintain high utilization rate. 

 Downstream operation to improve. 

• FR’s downstream operation is expected to deliver better results on the back of: 
  1. higher sales volume coming from the biodiesel contracts from Pertamina (awarded 60,000 tonnes for Nov 15 to Apr 16), 
  2. better margins as biodiesel sales have a higher margin than the pure refining margins. 
• We are expecting downstream’s EBITDA to grow 10% for 2016. 

EARNINGS REVISION/RISK 

• We have adjusted 2016 and 2017 forecasts down by 29% and 24% respectively after adjusting down FFB production growth to flat from 10% previously, incorporating a higher effective tax rate and higher depreciation to reflect the adoption of amendments to FRS 16 and FRS 41 on plantation assets. 
• We are now expecting EPS of 8.4 US cents, 11.0 US cents and 11.8 US cents for 2016, 2017 and 2018 respectively. 

VALUATION/RECOMMENDATION 

• Maintain BUY with lower target price of S$2.00 (previous: S$2.40), based on 17x 2016F PE. FR remains one of our top picks in the plantation sector for its cost efficiency, hands-on management and better downstream operation. 

SHARE PRICE CATALYST 

• Rally in CPO prices.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-26

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.00 Down 2.40