First Resources Ltd - CIMB Research 2016-11-09: Early signs of recovery in output from El Nino

First Resources Ltd - CIMB Research 2016-11-09: Early signs of recovery in output from El Nino FIRST RESOURCES LIMITED EB5.SI

First Resources Ltd - Early signs of recovery in output from El Nino

  • 9M16 core earnings were above our forecast but below consensus estimates.
  • FFB output fell 11%/14% yoy in 3Q16 /9M16 due to El Nino-induced drought.
  • Higher CPO price and net drawdown of inventory lifted plantation earnings in 3Q16.
  • Refinery and processing profit improved qoq due to higher volumes and margins.
  • Maintain Add with higher target price of S$2.32 (13x FY18 P/E) due to rollover effect.

3Q core earnings above our estimates 

  • First Resources’ (FR) 9M16 core net profit was above our forecast, but below consensus. 9M16 core net profit made up 89% of our full-year forecast but only 67% of the consensus number. 
  • We expect weaker earnings in 4Q, which is seasonally the lower production period for the group. As expected, no dividend was declared in 3Q16.

Firing on all cylinders in 3Q 

  • The group’s 3Q16 core net profit rose 33% qoq to US$35m due mainly to higher earnings from its plantation as well as refinery and processing divisions. 
  • Plantation EBITDA jumped 18% qoq due to higher palm product prices and FFB output (+43% qoq). 
  • Refinery and Processing EBITDA posted a profit of US$11m in 3Q16 against a loss of US$7m in 2Q16 due to higher utilisation at its processing plants and margin.

Stronger ASPs and net drawdown of inventory in 3Q 

  • ASP achieved for CPO grew 23% qoq to average US$611 per tonne in 3Q16, which is lower than the 3Q16 CPO price for Belawan of US$694 per tonne. This could be due to forward sales, the US$50 per tonne export levy and higher export sales. 
  • The 3Q results were also boosted by a net inventory draw down of 33,000 tonnes in 9M16 compared to a net inventory build-up of 92,000 tonnes in 9M15.

Higher selling prices trumped lower output in 3Q16 

  • The group’s 3Q16 core net profits grew 13% yoy as higher CPO prices trumped lower FFB output, weaker refining margins and higher depreciation charges. However, 9M16 net profit fell 24% due to weaker plantation and downstream earnings. 
  • FFB output fell 11%/14% yoy in 3Q/9M16 as yields were negatively affected by the El Nino. Depreciation charges grew by 81% in 3Q and 73% in 9M16 due to the adoption of IFRS 41 and 16.

Outlook for the rest of the year 

  • The group indicated that CPO prices continue to be influenced by competing oils and the low crude oil prices. It expects the Indonesian biodiesel mandate and the current low palm oil inventories to provide support for prices. 
  • It also indicated that it saw less pronounced declines in production volumes in 3Q16 compared to 1H16 as the El Nino impact gradually tapers off. It expects FY16’s production to be weaker than FY15’s.

Revision to earnings forecasts and target prices 

  • We raise our FY16 earnings forecasts by 15% to reflect higher palm kernel prices and processing volumes. However, we cut FY17 earnings to reflect lower yield expectation.
  • Our target price rises to S$2.32 as we roll over to end 2017 (based on FY18 P/E of 13x, its average historical P/E). 
  • We keep to our Add call due to the group’s estates’ young age profiles (50% of planted estates below seven years old). 
  • Key re-rating catalyst is stronger-than-expected earnings. Key risks are lower CPO prices and production.

Ivy NG Lee Fang CFA CIMB Research | 2016-11-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.32 Up 1.950