First Resources - DBS Research 2016-11-10: Yield recovery priced in

First Resources - DBS Vickers 2016-11-10: Yield recovery priced in FIRST RESOURCES LIMITED EB5.SI

First Resources - Yield recovery priced in

  • 3Q16 earnings of US$35.9m was slightly below expectations.
  • FFB yields recovered strongly, but margins were held back by sequentially lower ASP and higher tax rate.
  • Forecasts, TP unchanged.
  • Maintain HOLD.

What’s New 

3Q16 earnings slightly below 

  • First Resources (FR) booked 3Q16 earnings of US$35.9m (+26% y-o-y; +37% q-o-q) – slightly behind our expected US$36.7m-40.1m range due to timing differences in crude palm oil (CPO) and palm kernel (PK) sales volumes and sequentially higher income tax rate (33% vs.24% in 2Q16). This brought 9M16 earnings to US$67.3m (-24% y-o-y) – representing 61% of our fullyear target. The sequential earnings growth reflects 29%/31% recoveries in CPO and PK sales volumes, respectively. 
  • Similar to peers, the group had accumulated c.15k MT of CPO inventory during the quarter. We expect this to be recognised in 4Q16 sales.
  • 3Q16 EBITDA for both Plantations and Refining & Processing showed sequential improvements, thanks to better prices and utilisation rates. However, EBITDA margin for Plantations eased slightly to 56% from 62%; as implied CPO ASP declined 2% q-o-q to US$611/MT.
  • Overall, gross profit came in at US$80.5m (+22% y-o-y; +43% q-o-q), which translated to gross profit margin (GPM) of 53% - up from 42% in 2Q16 – as Refining & Processing margin turned positive.
  • For the quarter, FR’s top line expanded 41% y-o-y to US$151.5m, driven by higher CPO/PK revenues. The group’s cost of sales increased at a faster rate of 69% yo-y, which implied that feedstock for the Refining and Processing (i.e. CPO) were mostly outsourced.
  • For the quarter, FR’s cash flow from operations amounted to US$97.7m. This was higher than reported net profit due to both shorter receivables and longer payables. Accordingly, rolling cash conversion cycle was calculated at 63 days – shorter than 86 days in 2Q16.
  • As at end September 2016, FR’s net gearing ratio was 30% - down from 41% in June 2016 – mainly on the back of US$159m q-o-q drop in borrowings.

Recovering FFB yields in 3Q16 

  • FR’s own fresh fruit bunch (FFB) output for the quarter rebounded 43% q-o-q to 1.6m MT, but still 11% behind last year, as delayed impact of 2015 El Nino dissipated.
  • For the quarter, FFB yield had rebounded to 5.0 MT/ha from 3.5 MT/ha in 2Q16 – but still below 6.0 MT/ha in 3Q15. FFB output from smallholders had likewise rebounded 59% q-o-q and surpassed last year’s number by 14%. These translate to 9M16 CPO output of 429k MT.


Expect continued recovery in 4Q16 output 

  • We expect the group’s FFB output to peak in October, before seasonally declining again towards the end of the year. For this reason we maintaining own FFB production target of 2.3m MT – representing 10% y-o-y decline.
  • This should translate to CPO production of 637k MT (- 7% y-o-y) for the full year, or 208k MT of CPO production in 4Q16 (+14% q-o-q).

Lower biodiesel allocation to Pertamina 

  • As part of the government’s biodiesel programme, FR had been allocated to deliver 55,338 kl of biodiesel from November 2016 through April 2017 – down from 73,078 kl in the previous year and 65,949 kl in the previous 6 months.

Slower-than-expected expansion 

  • The group’s own estates had expanded 632 ha in 9M16 out of its full-year target of 1.6k ha. This means that the group would need to expedite planting of c.1k ha in 4Q16. Pending management guidance, we are maintaining our forecast.


  • We expect earnings to pick up in 4Q16 on price recovery and back-loaded sales volumes. We also expect refining utilisation rate to improve on better feedstock availability.
  • We employed DCF methodology to value FR. Based on our current forecast, FR’s fair value is estimated at S$1.90 (WACC 12.6%; TG 3%). 
  • Our HOLD rating is hence maintained on limited 5% upside.

Ben Santoso DBS Vickers | 2016-11-10
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.900 Same 1.900