First Resources - UOB Kay Hian 2016-08-16: Expect Stronger Sales Volume In 2H16

First Resources (FR SP) - UOB Kay Hian 2016-08-16: Expect Stronger Sales Volume In 2H16 FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Expect Stronger Sales Volume In 2H16

  • As expected, management revised down FFB production growth guidance to -10% yoy for 2016 (we estimate -9.6%). 
  • For 2016, we lift our sales volume assumption as we anticipate stronger sales in 2H16, but trim downstream EBITDA margin as we expect higher cost due to more external CPO intake to ramp up utilisation rate. 
  • All in all, we increase 2016 net profit forecast by 11.4% but maintain 2017-18 estimates.
  • Maintain BUY. Target price: S$2.00.



WHAT’S NEW


FFB nucleus production growth guidance of -10% yoy for 2016. 

  • Management revised down its FFB nucleus production growth guidance to -10% yoy for 2016 (previously flat to -5% yoy). 
  • We forecast FFB nucleus production growth of -9.6% yoy for 2016, in line with management’s guidance. 
  • The revision was mainly due to more severe than expected yield impact from its older oil palm areas in Riau and the acquired plantation in West Kalimantan.

Good biodiesel sales thus far. 

  • FR’s biodiesel delivered made up 80-90% of the secured volume. It has secured a biodiesel supply contract of 65,949kl for May-Oct 16. This is likely to contribute to downstream earnings. The biodiesel supply contract for 2017 is likely to be announced in Oct 16 or early-Nov 16.

Raise upstream palm oil sales volume. 

  • CPO production decreased 18.8% yoy in 1H16, but sales volume of CPO products declined by a smaller 11.4% yoy mainly due to inventory drawdown. There was a net drawdown of 29,000 tonnes (10% of sales volume) in 1H16 vs a net build-up of 22,000 tonnes in 1H15. We raise our CPO sales volume forecast for 2016 by 4.8% as we expect sales to pick up in 2H16 on the back of higher demand from China. CPO sales volume for 1H16 accounted for 43% of our full-year forecast.

Increase downstream sales volume but trim EBITDA margin assumptions for 2016.

  • Downstream sales volume for 1H16 contributed a stronger-than-expected 68% of our fullyear estimate. Thus, we lift our 2016 downstream sales volume forecast by 8%. However, we trim our EBITDA margin assumption as we expect higher cost due to more external crop intake to ramp up utilisation rate. 
  • All in all, we cut downstream EBITDA contribution by 17% to US$7.1m for 2016.


STOCK IMPACT

  • To recap, FR reported strong 2Q16 results and outperformed peers, which suffered from much lower bottom-lines on lower production. 
  • FR’s strong performance was mainly supported by higher sales volumes of crude and refined products, better CPO ASP in upstream operations and lower cost of fertilisers in 2Q16 vs 1Q16 and 2Q15.

Other key takeaways from the results conference call: 

  • Production to likely peak in Sep 16. FFB nucleus production increased 13.8% mom to 172,738 tonnes (-11.6% yoy) in Jun 16. Management is expecting FFB production to be flat or weaker mom in Jul 16 as there are lesser harvesting days due to the Hari Raya holidays. It expects a marginal pick-up in production in Aug 16 and likely to be followed by peak production in Sep 16 (vs peak production in August in 2014 and 2015). Meanwhile, the production mix was 40% in 1H16 and 60% in 2H16.
  • Rainfall normalised in 1H16. There was good rainfall across all of FR’s planted regions in 1H16. Thus, management is expecting a strong production recovery in 2017. However, management said it is too early to guide for 2017 FFB production growth.
  • Lower new planting. Management revised down new-planting target to 1,000- 2,000ha for 2016 (from 4,000ha). New planting activities have been slow with only 500ha planted in 1H16, mainly due to the consideration for sustainability with management conducting a more in-depth study on higher carbon stocks.
  • Good biodiesel sales thus far. FR’s biodiesel delivered made up 80-90% of the secured volume. It secured a biodiesel supply contract of 65,949kl for May-Oct 16. This is likely to contribute to downstream earnings. The biodiesel supply contract for 2017 is likely to be announced in Oct 16 or early-Nov 16.
  • Demand from China to support CPO prices. Management is expecting China to continue restocking CPO in the next few weeks. Thus, this would act as a key support for CPO prices, given the higher production will only come in 4Q16 and this will still be lower than that in 2015.
  • Deferred tax income recognition. Management indicates FR could report deferred tax income arising from government incentives for revaluing assets. However, the quantum of the deferred tax income and the timeline for the recognition are yet to be determined. We think management is likely to adopt a more conservative write-back so as to not distort the reported core earnings.


EARNINGS REVISION/RISK

  • Raise earnings estimates. We raise our 2016 net profit forecast by 11.4% but maintaining 2017-18 net profit forecasts. 
  • We forecast EPS of 6.6 US cents, 8.6 US cents and 8.4 US cents for 2016-18 respectively.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$2.00, based on 17x 2017F PE. FR is one of our preferred picks in the plantation sector for its cost efficiency and hands-on management.


SHARE PRICE CATALYST

  • Rally in CPO prices.
  • Sustainability of better-than-peers’ downstream margin.




Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000


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