First Resources - DBS Research 2016-10-24: Crowded trade

FIRST RESOURCES LIMITED EB5.SI

First Resources - Crowded trade

We expect First Resources (FR) to book strong recoveries in 3Q16 and 4Q16 earnings – premised on better ASP and seasonal yield recovery. This will be partly offset by lower EBITDA contribution from processing and refining segment, as we impute a drop in biodiesel volume for the year (based on government allocations year-to-date) – vis- à-vis our previous expectations.
We believe the brunt of El Nino impact is more than priced in.

In this report, we downgrade our rating to HOLD on limited 8% potential upside.

We tweaked our earnings projections to account for minor changes in CPO price forecasts; as well as slower recovery in FY17F FFB yield than previously anticipated. Offsetting this, external FFB purchases were revised higher from FY17F – on expectations of FFB yield recovery from adverse impact of 2015 El Nino – to optimise the group’s mill utilisation rate.
FR’s CPO output is consequently raised by c.2% p.a. – thereby raising the group’s top lines and free cash flows throughout our DCF forecast period.

FR’s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to the group’s strong volume and earnings growth through FY18F.
Subject to any opportunistic acquisitions, we expect FR’s output growth to decelerate from FY19F, as new planting is forecast to moderate from FY16 onwards (excluding new acquisitions).

We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$1.90/share (WACC 12.6%, Rf 8.1%; Rm 15.0%; β 0.9x; TG 3%) – raised from S$1.80 previously.
We believe FR’s earnings recovery is already partly baked into the current share price.

FR’s share price is linearly driven by CPO price expectations and partly by refining/biodiesel margins. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year.
CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina.
Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-10-24

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 1.90 Up 1.800