First Resources Ltd - CIMB Research 2016-08-15: Higher price to offset lower output in 2H16

First Resources Ltd - CIMB Research 2016-08-15: Higher price to offset lower output in 2H16 FIRST RESOURCES LIMITED EB5.SI

First Resources Ltd - Higher price to offset lower output in 2H16

  • We are neutral following the group’s 1H16 results teleconference.
  • The group’s guidance for FFB output to decline by 10% in FY16 is negative.
  • However, this is offset by potential tax credit from its assets revaluation exercise.
  • We cut our FY16-17F earnings by 2-11% to reflect lower output assumptions.
  • Maintain Add call with a lower target price of S$1.95 (13x forward P/E). 

Key takeaways from 1H16 results teleconference 

  • The main takeaways from FR’s 1H16 results teleconference are: 
    1. it now expects FFB output to decline by 10% due to the El Nino effect; 
    2. cost of production guidance revised up by US$10/tonne to US$230/tonne; 
    3. new planting target cut to 1,000-2,000 ha vs. 4,000 ha; 
    4. some tax credit may be booked in 2H16 from revaluation of assets; and 
    5. 2Q net profit benefitted from a net drawdown of 20k tonnes of palm oil inventory.

Lower output guidance offset by potential tax credit 

  • We are negative on the lower production guidance, even though the projected 10% decline in output by FR is at the lower end of the range of 10-20% decline in FY16 output guided by larger peers. But this is partially offset by higher PK prices as well as potential lower tax rate in 2H due to potential tax credit recognised in 2H to reflect the asset revaluations exercise in 2015. 
  • Overall, we are neutral following the teleconference.

Stronger 2H output prospects 

  • FR lowered its guidance to a 10% drop in production for FY16 against its previous expectation of a flat or 5% decline in output. The is due to tree stress from 2015 El Nino which affected the older palm. 
  • The group revealed that weather conditions at its estates have normalised and production should pick up from Aug/Sep. 
  • 2H16 production will be 60% of full-year output and 5% below last year’s based on the revised guidance.

Potential tax credit from asset revaluation exercise 

  • The group revealed that it has revalued some of its plantation assets to take advantage of the lower 3% tax rate on revaluation gains, instead of 10%. This exercise will allow FR to benefit from lower income taxes and book in some deferred tax income upfront. 
  • The group did not reveal the potential tax benefit as the revaluation gain is pending approval from the authorities but indicated they could recognise some in 2H.

Other notable takeaways 

  • The group revised down new planting targets to 1,000-2,000 ha, from 4,000 ha previously, for FY16. The group drew down 20k and 29k tonnes of inventory in 2Q and 1H16, respectively. 
  • For 2017, the group indicated that 17k ha of estates will come on stream and it could post double-digit growth as palm trees recover from the El Nino and low production base.

Cutting earnings but maintain Add call 

  • We cut our FY16-17F earnings by 2-11% to reflect lower output assumptions. This reduces our target price to S$1.95, based on 13x FY17 P/E (historical average). 
  • We continue to like the stock for its young estates and low production costs. 
  • Key risks are lower CPO prices and yield.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2016-08-15
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.950 Down 1.980