First Resources - UOB Kay Hian 2016-09-15: Earnings Growth To Drive Performance

First Resources (FR SP) - UOB Kay Hian 2016-09-15: Earnings Growth To Drive Performance FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Earnings Growth To Drive Performance

  • FR’s share price recovered 19% from its recent low after the company outperformed peers in 2Q16 and also because of its high leverage to the recovery of CPO prices.
  • FR should deliver better results in 2H16 vs 1H16, driven by higher production and better realised palm product prices. FFB production picked up in June and July, with yoy decline narrowing to -10% in Jul 16 from -11.6% in Jun 16 and -25.9% yoy in Mar 16. 
  • Maintain BUY. Target price: S$2.00.


Weakness offers opportunity to accumulate. 

  • First Resources’ (FR) share price recovered by 19% from its recent low in mid-Jul 16 post the weak 1Q16 results and sharp decline in CPO prices. The share price recovery came after FR outperformed peers in 2Q16, during which CPO prices coincidentally resumed on an uptrend as the market began to realise how tight palm oil supply was. Any weakness in FR’s share price could be a good opportunity to accumulate as we foresee potentially strong 2H16 results which could be a strong catalyst.

Expecting strong 2H16 earnings. 

  • Based on our net profit forecast of US$105m, we are expecting FR to deliver at least 70% of our full-year earnings estimate in 2H16. We view that this is highly possible given: a) 60% of its 2016 production is expected to come in 2H16; b) we expect a higher ASP of about US$600-620/tonne in 2H16 vs 1H16’s US$548/tonne; and c) lower costs in 2H16 as a bulk of manuring costs (35-40% of total cost of production) were booked in 1H16.

Production is in the midst of recovery. 

  • FR’s July fresh fruit bunch (FFB) nucleus production rose 7% mom but was still down 10% yoy. This is an encouraging set of data, considering that there were fewer harvesting days in the month as Indonesian workers were on leave for a week to celebrate Hari Raya Puasa. Moreover, Jul 16 saw a smaller yoy production decline of -10% yoy vs Jun 16’s -11.6% yoy and Mar 16’s -25.9% yoy which was the sharpest monthly drop for the year. In 7M16, FFB nucleus production was down 15% yoy. We are expecting a marginal pick-up in production in Aug 16 and peak production to follow in Sep-Oct 16. Thus, we maintain our FFB nucleus production growth forecast of -9.6% yoy for 2016, in line with management’s revised guidance of -10% yoy.

Earnings highly leveraged to CPO prices. 

  • For every 10% increase in ASP from our base assumption of US$610/tonne for 2016 and US$634/tonne for 2017, FR’s earnings will increase by 29% and 27% respectively. For 1H16, ASP was at US$548/tonne and current Belawan CPO prices are in the range of US$700-735/tonne.


  • Maintaining net profit forecasts. We forecast an EPS of 6.6 US cents, 8.6 US cents and 8.4 US cents for 2016-18 respectively.


  • Maintain BUY and target price of S$2.00, based on 17x 2017F PE (5-year mean PE).
  • FR is one of our preferred picks in the plantation sector for its cost efficiency and hands-on management.


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

Singapore Research Team UOB Kay Hian | 2016-09-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.00 Same 2.000