First Resources - UOB Kay Hian 2016-05-16: 1Q16 Posts An Earnings Disappointment

FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - 1Q16: Posts An Earnings Disappointment

FR’s 1Q16 results were below our expectation due to a weaker-than-expected CPO ASP and refining margins.
Management indicated that production would only pick up in 4Q16. This has prompted us to reduce our FFB production growth forecast to - 2.8% yoy for 2016.
We expect better CPO ASPs in the coming quarters and earnings to be supported by stable biodiesel sales.
We trim our 2016-18 earnings forecasts by 11.7%, 16.7% and 22.4% respectively.

First Resources (FR) reported a core net profit of US$5.9m (-72.2% qoq, -76.7% yoy) for 1Q16, which is below our expectation. The key variance to our expectation came from:
1. Lower-than-expected CPO ASP. Management indicated that there was a one-month lagged impact on realised CPO ASP. Thus, 1Q16 CPO ASP only reflected the Dec 15 - Feb 16 prices. CPO prices started to move on an upward trend since Mar 16 and the positive impact will only be captured in 2Q16 results.
2. Refining margins came in lower-than-expected largely attributable to higher purchase of palm oil products from third-parties to increase utilisation. There were minimal third- party purchases of CPO for 1Q15 and 4Q15.
Adoption of amendments to FRS 41. After the adoption of the new and revised accounting standards relating to biological assets, FR’s total assets and deferred tax liabilities decreased by US$358.7m and US$87.7m respectively, while shareholders’ funds saw a downward revision of US$271.0m in 1Q16.
Depreciation expenses were restated to US$12.5m in 1Q15 (+US$4.8m) and 1Q16 depreciation expenses were reported at US$13.3m.

We have revised down our 2016 fresh fruit bunch (FFB) production growth forecast to -2.8% yoy from our previous forecast of flattish growth.
Management maintained its FFB production growth guidance of 0% to - 5% for 2016, and we expect production growth is likely to come in closer to the lower end of the guidance.
We had underestimated the impact of dry conditions on its older tree profile (about 25% are aged 18 years and above), which saw a significant decline in yields.
Meanwhile, the production from the younger areas in West and East Kalimantan were not sufficient to mitigate the sharp drop in production from the older trees.

We gather that weather has normalised compared with conditions last year. However, the lagged impact from the prolonged dry weather since early-15 will cap t 2Q16 and 3Q16 FFB production growth. As such, we should only see recovery in production from 4Q16 onwards.

Management is targeting new planting of 4,000ha for 2016. However, new planting activities have been slow with only 200ha having been planted in 1Q16. This is mainly due to FR’s consideration of sustainability with management conducting a more in-depth study on higher carbon stocks.

Due to a one-month lagged impact, 1Q16 CPO ASP (+2.6% qoq, - 24.4% yoy) only reflected the Dec 15-Feb 16 prices. The significant decline in prices yoy was mainly due to there being no export levy in 1Q15.
Nevertheless, we are expecting earnings to pick up in the subsequent quarters to reflect the current selling prices which are higher than 1Q16’s CPO ASP.

Downstream utilisation in 1Q16 was 86%.
In 2016, lower production at FR’s own estates will lead to higher third-party CPO purchases to maintain a high utilisation rate. This will reduce gross profit margins of refinery operations in 2016.
Biodiesel delivered for the previous contracts from Pertamina (Nov 15-Apr 16) formed about 80% of contracted volume.
FR secured a biodiesel supply contract of 65,949kl for May-Oct 16. This is likely to positively contribute to downstream earnings.

We have adjusted our 2016-18 forecasts downwards by 12%, 17% and 22% respectively, after cutting our 2016-18 FFB production growth forecast to -2.8% (from flattish growth), 10.7% (from 20.2%) and 17.0% (from 22.6%) respectively and incorporate lower refining margin assumptions.
We are expecting an EPS of 7.4 US cents, 9.1 US cents, and 9.1 US cents for 2016, 2017 and 2018 respectively.

Maintain BUY with a lower target price of S$2.20 (S$2.65 previously), based on 17x 2017F PE.
FR remains one of our top picks in the plantation sector for its cost efficiency, hands-on management and better downstream operations.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-16

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.20 Down 2.65