First Resources - UOB Kay Hian 2016-06-24: Next Catalyst To Come From Better Earnings Growth

First Resources - UOB Kay Hian 2016-06-24: Next Catalyst To Come From Better Earnings Growth FIRST RESOURCES LIMITED EB5.SI 

First Resources (FR SP) - Next Catalyst To Come From Better Earnings Growth

  • FR’s share price has been underperforming the FSSTI and peers to date. We expect a catch-up to come with the potentially better upcoming results on a healthier ASP and sales volume from its downstream operations. 
  • Despite the recent CPO price weakness, ASPs in 2Q16 are still better than 2Q15’s RM2,190/tonne. 
  • Downstream operations for 2017 will be supported by contracts from Pertamina. 
  • Maintain BUY. Target price: S$2.20.



WHAT’S NEW


Re-iterate BUY on FR. 

  • Plantation stock performances were relatively flat post the 1Q16 results season and also because of the weakening of CPO prices. CPO spot prices weakened from a high of RM2,716/tonne in Apr 16 to RM2,461/tonne currently, but to date it is still up by 16.7% yoy. 
  • First Resources’ (FR) share price has been underperforming peers to date, given the two consecutive quarters of earnings disappointments. Investors should accumulate FR’s shares not only on the potential earnings recovery in the coming quarters, but also because strong FFB production is expected to come from its young areas in Kalimantan and this will provide good earnings support to FR in the event of weaker CPO prices and when replanting takes place in 2018.

Stronger earnings ahead. 

  • For 2Q16, we expect FR to have recorded higher qoq FFB production (expected to be in the range of +5-8% qoq but still down by about 18-20% yoy) and expect net CPO ASP to be at around US$600/tonne, ie flat yoy (2Q15: CPO ASP: US$593/tonne) or +20% qoq.

Lower production yoy but relatively still good. 

  • We are projecting FR’s 2016 FFB production to decline by 2.8% yoy and management guided for growth between zero and -5%. We are expecting a contraction in production because its Riau estates (close to 80% of its current production) were badly hit by dryness and haze in 2H15. 
  • The impact would be more severe on older trees, which make up the bulk of Riau’s mature areas. Production from younger areas in West and East Kalimantan has not been sufficient to mitigate the sharp drop in production from the older trees. Rainfall been good in Sumatra and most of the Kalimantan areas, thus we do not expect further stress on trees and downside to production.


IMPACTS


Dismal 1Q16 results. 

  • Recall that 1Q16 results were disappointing as ASPs were lower than expected (due to time lag between market and actual realised prices), higher third- party CPO purchases diluted refining margins and sales volumes fell short of expectations. FR booked low production as FFB yields were affected by the El Nino- induced drought, leading to higher cost per tonne as well. Meanwhile, the high CPO prices will only be reflected in the upcoming 2Q16 results.
  • CPO prices have weakened as market concerns on weaker external demand and an improvement in US weather conditions has eased fears of the impact from dry weather on oilseeds production. However, we expect prices should start to resume on an uptrend as inventory level is likely to stay low even with oil palm trees entering the higher production season. 
  • We maintain our CPO price assumptions of RM2,500/tonne and RM2,600/tonne for 2016 and 2017.


EARNINGS REVISION/RISK


Maintain earnings forecasts. 

  • We are expecting EPS of 7.4 US cents, 9.1 US cents, and 9.1 US cents for 2016-18 respectively.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$2.20, 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.
  • FR’s share price correlation to CPO prices has weakened after two consecutive quarters of earnings disappointments. We expect share price to pick up as earnings growth resumes in the next few quarters.


SHARE PRICE CATALYST

  • Rally in CPO prices.
  • Sustainability of better-than-peers’ downstream margin.




Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-24
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.20 Same 2.20


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