First Resources - DBS Research 2016-05-13: Lower yields, lower prices, low-margin downstream

FIRST RESOURCES LIMITED EB5.SI

First Resources - Lower yields, lower prices, low-margin downstream

1Q16 earnings below our/consensus expectations
Drop in yields and weaker ASP were the main culprits; given one-month lag time between pricing and delivery
Output growth indicated to skew towards lower end of 0% to -5%.
Forecasts, TP unchanged for now.

First Resources (FR) booked 1Q16 earnings of US$5.8m (-75% y-o-y; -71% q-o-q), representing just 4% of our full-year target. The poor results underlined dips in both its implied crude palm oil (CPO) average selling price (ASP) of 24% y-o-y and own Fresh Fruit Bunch (FFB) production of 15% y-o-y.
They were partly mitigated by a 108% y-o-y jump in EBITDA contribution from Refining and Processing, thanks to allocation of biodiesel mandate. Overall, gross profit came in at US$34.8m (-35% y-o-y), which translated to gross profit margin (GPM) of 31% - reflecting dilution from lower-margin downstream business. 1Q15 numbers were restated to account for reclassification of biological assets as bearer plants.
For the quarter, FR’s top line expanded 17% y-o-y to US$113.1m, again, mainly driven by higher Refining and Processing volume. However this had likewise driven up the group’s cost of sales by 82% y-o-y, which implied that feedstock for the Refining and Processing (i.e. CPO) were mostly outsourced.
For the quarter, FR’s cash flow from operations was – US$29.4m. This was higher than reported net profit, given drawdown of inventory, amortisation of bearer plants and longer payables. Rolling cash conversion cycle was calculated at 73 days – shorter than 101 days in 4Q15.
As at end March 2016, FR’s net gearing ratio is estimated at 39.2% - up slightly from 37.4% in December 2015 (restated) – mainly on the back of lower cash balance.

FR’s own FFB output for the quarter shrank by 15% y- o-y (-34% q-o-q), reflecting lagged impact of dry weather in CY15. Approximately 84% of its FFB output had come from Riau (vs. 86% in 4Q15); and the remaining from West Kalimantan. While we understand rainfall had normalised in 1Q16, we expect to see subdued recovery in 2Q16 output.
The group drew down 32k MT of CPO during the quarter, reflecting excess demand amidst a steeper- than-usual seasonal drop in output. We understand the group had booked c.45k MT of third-party CPO purchases in 1Q16 and a net total inventory drawdown of 9k MT. Hence, excluding the 32k MT difference between CPO output and CPO sales volume, the group had recognised inventory build-up of c. 23k MT in Refining and Processing segment. We expect this to be recognised in sales in 2Q16. We understand FR’s refinery was running at 86% utilisation rate during the quarter, given biodiesel production for Pertamina.

FFB output growth guidance is kept unchanged at between zero and negative 5%, although this may indicatively skew towards the lower end of this range.
Discounting a subdued seasonal recovery in 2Q16, this implies a stronger-than-usual pick-up in 2H16 FFB output. We understand peak output may occur in the early part of 4Q16. We are leaving our forecasts of 1% y-o-y drop unchanged for now.

As part of the government’s biodiesel programme, FR had been allocated to deliver 73k MT of biodiesel from November 2015 through April 2016. The next allocation of May 2016 through October 2016 would be c.66k MT. The group however does not disclose its biodiesel selling volumes.

The group had expanded c.200 ha in 1Q16 out of its full-year target of 4k ha. The small achievement was due to time needed to study high carbon stock (HCS) areas – rather than regulatory issues. The group had not revised its expansion guidance of 4k ha.

Despite the poor results, we expect earnings to pick up in subsequent quarters on price recovery and back-loaded output growth. We suspect refining utilisation rate could come down should the group continue to see stock build- up in 2Q16.
We employed a 10-year DCF methodology to value FR. Based on our revised forecasts, this is estimated at S$1.85 (WACC 12.8%; TG 3%). Our HOLD rating is hence maintained.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-05-13

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