First Resources - RHB Invest 2016-08-15: Looking Toward A Brighter 2H16 | SG Investors.io

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First Resources - RHB Invest 2016-08-15: Looking Toward A Brighter 2H16

First Resources - RHB Invest 2016-08-15: Looking Toward A Brighter 2H16

FIRST RESOURCES LIMITED EB5.SI

First Resources - Looking Toward A Brighter 2H16

First Resources (FR) continued to be affected by the El Nino in 2Q16, although we believe the 2H16 should see a marked recovery in FFB output and therefore unit costs. Downstream margins could also see a reversion to profitability in 2H16, as 2Q16 saw competitive pressures for feedstock result in negative margins.

We leave our forecasts and TP of SGD1.80 unchanged for now, pending the analyst briefing later today.
Although we expect better prospects in 2H16, we believe valuations are fair at current levels.
Maintain Neutral.

FFB output expected to recover in 2H16.

FR’s 1H16 FFB output declined 16% YoY versus our projected -7.6% for FY16 and management’s original guidance of -5% YoY.
Assuming FFB output represents a ratio of 40:60% in 1H:2H, FR should be able to meet our FFB forecast for FY16.

Negative downstream margins to reverse in 2H?

FR’s downstream division saw the same fate as its peers, where margins went into negative territory, likely due to the same reason of intense competition for external CPO in a drought environment.
We expect this to reverse in 2H16, however, on the back of the seasonal peak production.

CPO price rose 31% QoQ.

FR’s 2Q16 transacted CPO price of USD621/tonne was 31% higher QoQ and in line with expectations, given the one month price recognition time lag that it experiences due to the sale of CPO to its downstream unit.
Although CPO prices moderated in 3Q, we expect 2H to be better for FR on the back of better productivity and therefore lower unit costs.
For every MYR100/tonne change in CPO price, FR’s earnings are impacted by 4-5% p.a.

NEUTRAL.

No change to our earnings forecasts for now, pending the analyst briefing on Monday morning.
We maintain our TP of SGD1.80, which implies 18x P/E on 2017 earnings and an EV/ha of USD12,000/ha, which is in line with its peers of USD10,000-15,000/ha.
FR’s large exposure to Riau (67%) puts it at risk in the face of weak weather-led productivity, while valuations look fair at current levels.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-15

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.80 Same 1.800