First Resources Ltd - CIMB Research 2016-08-14: Superior 2Q results vs. upstream peers

First Resources Ltd - CIMB Research 2016-08-14: Superior 2Q results vs. upstream peers FIRST RESOURCES LIMITED EB5.SI

First Resources Ltd - Superior 2Q results vs. upstream peers

  • 1H16 core earnings in line with our forecast but below consensus estimates.
  • FFB output fell 16% yoy in 2Q16 and 1H16 due to El Nino-induced drought.
  • Higher production and CPO prices lifted plantation earnings in 2Q16.
  • Better results against larger peers due to smaller yoy drop in 2Q yields and output.
  • Maintain Add and target price to S$1.98, based on 13x FY17 P/E.

1H core earnings broadly in line with estimates 

  • First Resources (FR)’s 1H16 core net profit was in line with our forecast, but below consensus. 1H core net profit made up 37% of our full-year forecast, but only 28% of the consensus number. 
  • We expect stronger earnings in 2H, which is seasonally the higher production period for the group, while costs are typically lower, as 60-70% fertiliser costs are captured in 1H. 
  • As expected, a lower interim dividend of S$0.00625 was declared.

Strong qoq earnings growth due to higher CPO prices and output 

  • The group’s 2Q16 core net profit jumped close to five-fold to US$26m due mainly to higher plantation earnings which more than offset losses from its downstream division.
  • Plantation EBITDA jumped 163% qoq due to higher CPO prices and FFB output (+9% qoq). ASP achieved for CPO grew 31% qoq to average US$621 per tonne in 2Q16, just a tad lower than the 2Q16 CPO price for Belawan of US$646 per tonne.

Higher depreciation charges impact 2Q and 1H earnings 

  • The group’s 2Q16 and 1H16 core net profits fell 13% and 47% yoy, respectively, due to lower FFB output, weaker refining margins and higher depreciation charges. 
  • FFB output fell 16% yoy in 2Q16 and 1H16, as yields were negatively affected by the El Nino induced drought that impacted its estates. Its downstream business posted a loss of US$7m in 2Q as refining margins were impacted by tight palm oil supplies. 
  • Depreciation charges grew by 67% and 70% in 2Q and 1H16 due to the adoption of IFRS 41 and 16.

Better 2Q results compared to Singapore peers 

  • FR’s 2Q16 core net profit of US$26m is better compared to the 2Q results of its larger peers like Golden Agri (2Q16: core net loss of US$43m) and Indofood Agri (core net loss of US$0.9m). We believe this is due partly to its younger estates profile which has enabled the group to post a smaller 16.4% yoy drop in FFB output for 2Q16 vs. Golden Agri (-31% yoy) and Indofood Agri (-26% yoy) for the same period.

Outlook for the rest of the year 

  • The group indicated that CPO prices have moderated from 2Q’s levels but remain supported by restocking of palm oil by importing countries in recent weeks. It expects 2H production volumes to recover in line with the seasonal upswing and gradual easing of the El Nino impact. However, it expects FY16’s production to be weaker than FY15’s.

Maintain earnings forecasts and target price 

  • We are keeping our earnings forecasts and target price of S$1.98 intact (still based on FY17 P/E of 13x, its average historical P/E). 
  • We keep our Add call due to the group’s estates’ young age profiles (50% of planted estates below 7 years old). 
  • Key re-rating catalyst is stronger than expected earnings. Key risks are lower CPO prices.

Ivy NG Lee Fang CFA CIMB Research | 2016-08-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.980 Same 1.980