First Resources - RHB Invest 2016-05-13: Dismal 1Q16, Expect Improvements From 2Q Onwards

First Resources - RHB Invest 2016-05-13: Dismal 1Q16, Expect Improvements From 2Q Onwards FIRST RESOURCES LIMITED EB5.SI 

First Resources - Dismal 1Q16, Expect Improvements From 2Q Onwards

  • FR’s first-quarter results were pretty dismal but we expect to see higher transacted CPO prices in 2Q16 (+25% QoQ) along with improved FFB output. 
  • Productivity should improve in 2H16, since this period is the peak of the production cycle. 
  • Maintain BUY with a lower TP of SGD1.90 (from SGD2.35, 11% upside), as we believe valuation is relatively low currently, as it is trading at less than +1SD above its mean (particularly in a rising CPO price environment) and an implied EV/ha of just USD11,000.

FFB output expected to recover in 2H16. 

  • Given the weakness seen in FFB output in 1Q16, we have lowered our FFB output forecast by 7 to 8% ie lower than management’s guidance of 5% lower. 
  • We continue to expect to see increasing contributions from its biodiesel division this year, given the new biodiesel contract awarded to it for the period of May to October.

Forecasts reduced. 

  • We trim our earnings estimates by 11.3-14.5% for FY16- 18F, after taking into account the lower FFB growth, higher unit costs, lower new planting targets and higher effective tax rates.

One month lag for CPO price recognition. 

  • First Resources’ transacted CPO price for 1Q16 was much lower than market prices due to the 1-month lag caused by the sale of its CPO to its downstream unit. 
  • We expect 2Q16 to record better earnings vis-à-vis 1Q16, as CPO prices for the period March-May are higher by 25% from Dec-Feb. 
  • We still expect rising CPO prices to lift the company’s earnings, given its sensitivity of 4-5% for every MYR100/tonne change.

Still a BUY. 

  • Post-earnings revision, we reduce our TP to SGD1.90, based on 19x 2016F earnings. This implies an EV/ha that is in line with its SGX-listed and JSX-listed peers, but below the Malaysian peer average of USD30,000/ha. 
  • Despite the disappointing performance, we expect earnings to recover slightly in this quarter and more in the second half of the year, while valuations remain attractive at 16x 2016F P/E vs its regional peers’ of 18-22x.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-13
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.90 Down 2.35