First Resources - UOB Kay Hian 2016-07-28: FFB Production Below Expectations; Expect Higher qoq Earnings In 2Q16

First Resources - UOB Kay Hian 2016-07-28: FFB Production Below Expectations; Expect Higher qoq Earnings In 2Q16 FIRST RESOURCES LIMITED EB5.SI 

First Resources (FR SP) - FFB Production Below Expectations; Expect Higher qoq Earnings In 2Q16

  • We cut earnings forecasts after adjusting down FFB production growth to -9.6% from -3.2% for 2016. 
  • The dry weather impact is more severe than expected and the FFB yield recovery in 2H16 could be delayed as well. 2017 is expected to be a better year with FFB yield recovery supporting earnings. 
  • We forecast FR to deliver core net profit of US$18m-20m in 2Q16 (1Q16: US$5.9m, 2Q15: US$29.7m). 
  • Maintain BUY. Target price: S$2.00.



WHAT'S NEW


FFB yield recovery slower than expected. 

  • First Resources’ (FR) 2Q16 FFB production was 8.6% higher qoq, coming in as expected, but still down 15.6% yoy. 
  • For 1H16, FFB nucleus production of 917,038 tonnes (-15.9% yoy) were below our expectation, at only 37.5% of our 2016 estimate. 
  • We are revising down our FFB nucleus production growth forecast from -3.2% yoy to -9.6% yoy after factoring in weaker 1H16 production and a late production recovery. 
  • FR is scheduled to release 2Q16 results on 12 Aug 16 after market close.



STOCK IMPACT


2Q16 results preview. 

  • We forecast 2Q16 core net profit of US$18m-20m (1Q16: US$5.9m, 2Q15: US$29.7m).
    1. Upstream EBITDA contribution higher qoq but still down yoy.
      We expect higher EBITDA from upstream operations in 2Q16 (1Q16: US$22.3m) but to still be lower than 2Q15’s US$59m. We see lower yoy sales volume in 2Q16 on the back of lower production, inventory was not high as at end-1Q16 and slightly lower ASP vs the US$593/tonne in 2Q15.
    2. Refining EBITDA lower qoq but higher yoy.
      Refining volume is likely to be lower qoq in 2Q16 due to the lack of feedstock because lower CPO production hit all producers. But refining volume would still be slightly higher than a year ago with contributions from the sales of biodiesel to Pertamina in 2Q16 (no biodiesel sales in 2Q15).

Stronger FFB production growth in 2017. 

  • After FFB production declined in 2016, we are expecting a 17.9% growth for 2017 assuming FFB yield recovers by 8% from 2016. 
  • With a large percentage of young and prime age areas (52% of total planted areas), FR is likely to experience a good yield recovery. However, our FFB production forecast for 2017 is only at a similar level to 2015’s despite FR having larger mature areas.


EARNINGS REVISION/RISK

  • We cut our 2016-18 net profit forecasts by 20%, 6% and 8% respectively, after reducing FFB production growth forecasts to -9.3% (from -2.8%), 17.9% (from 10.7%) and 16.9% (from 17.0%) respectively and incorporating lower refining margin assumptions.
  • We forecast EPS of 5.9 US cents, 8.6 US cents, and 8.4 US cents for 2016-18 respectively.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower target price of S$2.00 (down from S$2.20), based on 17x 2017F PE. Despite the lower earnings, FR is still one of our preferred picks in the plantation sector for its cost efficiency, hands-on management and better downstream operations.


SHARE PRICE CATALYST

  • Rally in CPO prices.
  • Earnings-enhancing acquisitions.



Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.00 Down 2.20


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