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.

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.

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.

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.

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