First Resources - DBS Research 2016-08-15: Low base effect

First Resources  - DBS Vickers 2016-08-15: Low base effect FIRST RESOURCES LIMITED EB5.SI

First Resources - Low base effect

  • 2Q16 earnings below our/consensus expectations.
  • Lower-than-expected FFB yields and Refining & Processing losses were the main culprits.
  • FY16F/17F earnings revised by -11%/+1%; TP unchanged. 
  • Brunt of El Nino impact is over; BUY for 10% upside to S$1.80.

Backloaded volume growth. 

  • We expect First Resources (FR) to book strong recoveries in 3Q16 and 4Q16 earnings – premised on better ASP and seasonal yield recovery. This will be partly offset by lower EBITDA contribution from processing and refining segment, as we impute a drop in biodiesel volume for the year (based on government allocations year-to-date (YTD) – vis-à-vis our previous expectations. 
  • We believe the brunt of El Nino impact is more than priced in. We upgrade our rating on FR to BUY for 10% upside potential.

FY16F/17F earnings revised by -11%/+1%. 

  • We no longer expect the group to meet our earlier output forecast of 2.432m MT (- 4% y-o-y), and hence have adjusted FY16F own FFB (fresh fruit bunches) output to 2.280m MT (-10% y-o-y). This translates to crude palm oil (CPO) output of 637.3k MT (-7% y-o-y) in FY16F, a cut from 677.8k MT previously. Yet, accounting for the steep decline in FFB yield this year, we expect FFB yields to recover by 10% next year (low base effect) – adjusted from 1% previously.
  • Therefore, FR’s FY17F FFB output should expand 20% y-o-y to 2.740m MT – a revision from 2.683m MT previously. Adjusting for the above changes, FY16F/17F earnings were likewise revised by -11%/+1%. This implies that FY17F earnings will rebound by 26% y-o-y.

Earnings, TP tweaked. 

  • Having adjusted our CPO price forecasts, exchange rates and production outlook for next year, we have adjusted FY16F/17F earnings by -11%/+1%.


  • We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$1.80/share (Rf 8.1%; Rm 15.0%; β 0.9x; WACC 12.4%, TG 3%) – cut from S$1.82 previously. 
  • At current price, we believe the market has more than priced in El Nino impact and weak Refining & Processing contribution.

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 | 2016-08-15
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 1.80 Down 1.820