First Resources Ltd - CIMB Research 2016-11-10: Stronger output prospects in FY17

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FIRST RESOURCES LIMITED EB5.SI

First Resources Ltd - Stronger output prospects in FY17

• We are positive on the group’s guidance of potentially lower tax rate in 4Q16.
• For every 1% pt change in our tax rate assumption, it could lift our net profit by 1%.
• However, this is partially offset by the low new planting rate of 656ha in 9M16.
• We maintain our earnings forecasts which suggest a weaker 4Q net profit.
• Maintain Add and target price of S$2.32, based on 13x FY18 P/E.

Key takeaways from results teleconference 

• The main takeaways from First Resources' 9M16 results teleconference are: 
  1. it maintains its guidance for FY16 FFB output to decline by 10%; 
  2. kept its cost of production guidance of US$230/tonne and new planting target of 1,000-2,000 ha; 
  3. friendly on CPO prices up till 1Q17; 
  4. expect some tax credit to be booked in 4Q16 from revaluation of assets; and 
  5. 3Q net profit benefited from a net drawdown of 4k tonnes of palm oil inventory.

Higher production in FY17 as El Nino impact fades 

• The group’s guidance of a 10% drop in FFB output for FY16 is in line with our assumption of a 10.4% decline. 
• FR maintained its view that 2H production will make up 60% of its full year output. The group also revealed that weather has been good across all of its estates in 2016 and the El Nino impact has gradually tapered off. This suggests stronger output prospects in FY17. 
• For 9M16, the group derived 83% of its output from its Riau estates, 16% from West Kalimantan and 1% from East Kalimantan estates.

Potential tax credit in 4Q 

• The group revealed that it has revalued some of its plantation assets to take advantage of the lower 3% tax rate on revaluation gains, instead of 10%. This exercise will allow FR to benefit from lower income taxes and book in some deferred tax income upfront. It expects to book some of these benefits in 4Q but said that it will not be significant. This could lower its effective tax rate for 4Q16 from 30% in 9M16.

Other notable takeaways 

• The group planted 656ha of estates in 9M16 which is short of its new planting targets of 1,000-2,000ha for FY16. The group drew down 4k and 33k tonnes of inventory in 3Q16 and 9M16, respectively. This helped boost 3Q and 9M16 earnings as the group built up 70k tonnes and 92k tonnes of stocks for the same period last year. 
• FR indicated that it expects CPO price to be supported at current level in view of tight inventories.

Outlook for 4Q16 

• We are projecting a weaker 4Q16 net profit of US$20m as production is seasonally weaker in 4Q and we expect a build-up in stocks during the last quarter. There could be upside to our 4Q earnings projection as we have not imputed potential tax credit into our forecasts. 
• We have imputed effective tax rate of 31% for the group in FY16. For every 1% pt change in tax rate, it could boost our FY16’s net profit by 1%.

Maintain earnings forecasts and target price 

• We maintain our earnings forecasts and target price of S$2.32 (based on FY18 P/E of 13x, its average historical P/E). 
• We keep 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 | http://research.itradecimb.com/ 2016-11-10

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