First Resources - RHB Invest 2016-08-16: Tempering Down FY16 Guidance, But Hopeful for FY17

FIRST RESOURCES LIMITED EB5.SI

First Resources - Tempering Down FY16 Guidance, But Hopeful for FY17

At First Resources’ analyst briefing, management set a cautious but optimistic tone, tempering down FY16 guidance but setting a more optimistic tone for FY17.
We revise down our earnings for FY16-18, resulting in a slightly lower TP of SGD1.73 (from SGD1.80, 6% upside), implying 18x FY17 P/E and EV/ha of USD11,500, which is in line with peers’ USD10,000-15,000/ha.

No change to our NEUTRAL call, as we believe valuations are fair at current levels, while its large exposure to Riau puts it at risk in the face of weak weather-led productivity.

First Resources has revised down its FFB output guidance to -10% (from flat to -5% previously).
Although it is already seeing normalised weather at its estates, management expects to see a marked recovery in output from September only. This means the peak period could come in later, during 4Q.
We have, therefore, revised our FY16 FFB output forecasts to reflect a -9.9% decline, followed by a higher 8-10% growth in FY17-18 (from 7-9%), coming from an anticipated recovery from tree stress.

With the lowered output, unit cost guidance has also been raised to USD220-230/tonne (from USD220 previously). We have adjusted our forecasts accordingly.

On the downstream front, although the refining division reversed into losses in 2Q, First Resources highlighted that this should technically be better in 2H, given the lowered CPO prices and the improved CPO output in this period.
In 2Q16, the group’s refinery operated at 65% utilisation, while 1H was at 76%. The biodiesel division is also doing decently well, as First Resources has delivered about 80-90% of its contracted biodiesel output to Pertamina so far. It is on track to deliver its 57,000 tonnes by October.
The group expects to see a new tender for biodiesel within the next few months.

Unlike Golden Agri-Resources (Golden Agri) (GGR SP, BUY, TP: SGD0.44), First Resources has yet to recognise any tax benefits from the revaluation of its Indonesian assets, although it has prepaid the taxes for its asset revaluation already.
The group is waiting for final approval from the Indonesian Government before recognising the deferred tax asset.
In addition, it has yet to be decided if it will recognise all the tax benefit upfront, or do so over a longer period.

All in, we revise our FY16 earnings down by 14.6% and our FY17-18 earnings down by 3-7%. This is after taking into account the above mentioned changes.

We reduce our TP to SGD1.73 (from SGD1.80), which implies 18x P/E on 2017 earnings and an EV/ha of USD11,500, which is in line with peers’ USD10,000-15,000/ha.
First Resources’ large exposure to Riau (67%) puts it at risk in the face of weak weather-led productivity, while valuations look fair at current levels.
Weather, exchange rates, and global supply and demand dynamics of edible oils are key risks.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-16

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.73 Down 1.80