First Resources - DBS Research 2016-06-14: On a slower growth path

First Resources - DBS Research 2016-06-14: On a slower growth path FIRST RESOURCES LIMITED EB5.SI 

First Resources - On a slower growth path

  • FY16F/17F EPS reduced by 7% and 20% on changes in our key assumptions
  • Disclosed 4Q15 production was in line, but ASP is expected to be below expectations
  • TP lowered to S$1.82; HOLD rating maintained

Headwinds this year. 

  • We expect First Resources (FR) to book strong recoveries in 2Q16 and 3Q16 earnings – premised on better ASP and seasonal yield recovery. This will be partly offset by lower expected EBITDA contribution from processing and refining segment, as we impute lower biodiesel volume for the year (based on government allocations YTD) – vis-à-vis our previous expectations. 
  • We are maintaining our HOLD call on this counter for limited 4% upside potential from current level.

Volume guidance lowered. 

  • The group had completed its bunch census in Feb-16, which revealed a deterioration in yields through Aug-16 – concluding in FFB output growth guidance of between zero and -5% this year. The group expects a similar trend for its smallholder estates’ production. 
  • We understand that both its Riau and West Kalimantan estates were hard hit by drought and haze in late FY15. The impact of these would be apparent in 1H16.

Earnings, TP tweaked. 

  • Having adjusted our CPO price forecasts, exchange rates and production outlook for next year, we have lowered FY16F/17F earnings by 7%/20% - arriving at revised TP of S$1.82.


  • We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$1.82/share (Rf 8.1%; Rm 15.0%; β 0.9x; WACC 12.4%, TG 3%). 
  • We lowered Indonesia’s risk free rate to 8.1% from 8.8%. 
  • At current price, we believe the market has already priced in significant recovery in FR’s earnings over the next two years.

Key Risks to Our View:

  • FR’s share price is linearly driven by CPO price expectations and partly by refining/biodiesel margins. A strong recovery in CPO prices (either due to data, weather or regulatory-driven) could boost the share price higher than our fair value, and vice versa.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-06-14
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.82 Down 1.85