First Resources - Maybank Kim Eng 2016-04-21: Off to a slow start

FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) Off to a slow start

FR had a good run (+14%) since our last upgrade in early 2016.
Given the limited upside, we now downgrade FR to HOLD (from BUY) with unchanged TP of SGD2.08 on 17x 2016 PER (pegged at +1SD above its historical mean) as we expect 1Q16 to come in below our and consensus expectations on low 1Q16 FFB output, low spot CPO ASP, and new depreciation charges following the revised FRS 16 and 41 accounting standards that came into effect on 1 Jan 2016.

FR announced a weak Mar 2016 FFB nucleus output of 144,113 MT (-26% YoY, -1% MoM), bringing 1Q16 FFB nucleus output to 491,478 MT (-15% YoY, -34% QoQ).
It last experienced a YoY output contraction in 1Q13. The lagged effect from the dry spell experienced in 3Q15 hurt FR’s group FFB yield in 1Q16 as it contracted 23% YoY to 3.1t/ha.

In 1Q16, MPOB’s spot CPO price averaged USD576/t (-8% YoY, +14% QoQ).
Taking into account the USD50/t CPO export levy imposed by the Indonesian government since 16 Jul 2015 to fund its biodiesel programme, the actual CPO price proceeds received by pure upstream Indonesia planters will be even lower YoY.
On its refinery contribution, we expect refining margins to be weak in 1Q16 given the seasonally low crop period and Indonesia’s refining over-capacity situation.

Given the low CPO ASP, low output, low refining margins, and USD14m (net of tax) new annual depreciation charges effective 1 Jan 2016 (see Fig 2-3), we estimate FR will report 1Q16 PATMI of USD20-24m or 15-18% of our and consensus full-year earnings estimates; below expectations.
We worry that its FFB output growth will remain in negative territory in 2Q16 and FR may not fully benefit from the recent CPO price hike. Hence, we downgrade FR to HOLD until we see better earnings recovery.

Ong Chee Ting CA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-21

Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 2.08 Same 2.08