First Resources Ltd - CIMB Research 2016-05-13: Earnings may have bottomed out in 1Q16

First Resources Ltd - CIMB Research 2016-05-13: Earnings may have bottomed out in 1Q16 FIRST RESOURCES LIMITED EB5.SI 

First Resources Ltd - Earnings may have bottomed out in 1Q16

  • 1Q16 results below due to lower-than-expected FFB output and CPO prices.
  • FFB output fell 15% yoy in 1Q16, lower than the group’s guidance and estimates.
  • Average CPO prices achieved fell US$150 per tonne due to lower market prices, higher CPO export levy of US$50 per tonne and lower export sales volumes.
  • We cut our FY16-17 EPS by up to 36% to reflect lower production and prices.
  • This led us to reduce our target price to S$1.98, based on 13x P/E. Maintain Add.

1Q16 net profit below due to lower selling prices and output

  • First Resources’ 1Q16 core net profit was below, making up only 4% of our and 3% of consensus full-year forecasts. The weaker earnings were due to lower-than-expected CPO prices achieved as well as output due to the lagged impact of El Nino. 
  • We expect stronger earnings in future quarters as 1Q is seasonally the lowest production quarter for the group and costs are typically higher, as 60-70% fertiliser costs are captured in 1H.

Worst quarterly earnings since 1QFY09

  • The group’s 1Q16 core net profit fell 83% yoy due to lower plantation earnings, higher depreciation and tax rate. Plantation EBITDA fell 58% yoy due to lower CPO prices and FFB output. ASP achieved for CPO fell 25% yoy to US$475 per tonne in 1Q16, lower than the 1Q CPO price for Belawan of US$596 per tonne. This is due to the export levy and larger portion (97%) of its sales volume was sold domestically vs. 28% in 1Q15.

FFB production below due to El Nino impact

  • FFB output fell 15% yoy in 1Q16, as yields were negatively affected by the El Nino induced drought that impacted its estates in 2H15. These were below the group’s guidance and our projection. 
  • We cut our production estimates and now project a 6% decline in its FFB output for FY16.

Positive downstream earnings and higher depreciation charges

  • Refining and processing posted a profit of US$3m in 1Q16 against a loss of US$2m in 4Q15 due to better refining/biodiesel margin and volumes. But this is more than offset by additional depreciation charges of US$5m, due to the adoption of FRS 16 and 41. 
  • The effective tax rate was also higher in 1Q due to non-tax deductible expenses.

Project better earnings in future quarters

  • The group revealed that the recent higher palm prices are expected to improve its 2Q performances. However, production for 2016 will be lower than the previous year due to the lagged effects of the dry weather in 2015. 
  • We expect 2Q prices to improve by around US$100 per tonne, which should raise the group’s pretax profit by US$10m.

Cutting earnings forecasts and target price

  • We lower our FY16-17 earnings forecasts by 6-36% mainly to reflect lower output assumptions and CPO prices. This leads to a 6% cut in our target price to S$1.98 (still based on FY17 P/E of 13x, its average historical P/E). 
  • We keep our Add call despite the disappointing earnings as we like the group’s estates’ young age profiles (51% of planted estates below 7 years old). 
  • Key re-rating catalysts are rising CPO price and better future quarterly earnings.

Ivy NG Lee Fang CFA CIMB Securities | 2016-05-13
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.98 Down 2.10