First Resources (FR SP) - Maybank Kim Eng 2016-11-10: Downgrade to HOLD. Limited upside.

First Resources (FR SP) - Maybank Kim Eng 2016-11-10: Downgrade to HOLD. Limited upside. FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Downgrade to HOLD. Limited upside.

3Q beat our forecast but met consensus 

  • After a dismal 1H16 that met only 36% of our FY16E, 3Q16 EPS caught up, with 9M16 forming 76% of our FY16E. 
  • As 3Q beat largely on the back of higher-than-expected net CPO ASPs, we raise 2016-17 EPS by 21%/9% for this. 
  • We also raise TP to SGD1.97 from SGD1.80, still at 17x 2017E P/E, its 5-year mean, after our EPS revisions. However, downgrade FR to HOLD from BUY given limited upside to our revised TP. 
  • Prefer Bumitama Agri (BAL SP, BUY, TP: SGD0.97) in the sector.

Higher CPO ASPs overshadowed lower output 

  • 3Q16 core PATMI grew 37% QoQ and 26% YoY to USD36m. This brought 9M16 core PATMI to USD67m (-13% YoY), which met 76%/68% of our/consensus FY16 forecasts. 
  • Its 3Q16 strength came from: 
    1. seasonally stronger FFB output coupled with better CPO ASPs; 
    2. positive downstream EBITDA margins of USD59/t (2Q16: -USD11/t, 3Q15: USD105/t); and 
    3. a net inventory drawdown of 4,000 MT to capitalise on strong CPO prices.

9M16 FFB output at 70% of our 2016E 

  • 3Q16 FFB output grew 43% QoQ to 0.68m MT though it was down 11% YoY. This was due to the lagged effects of the 2015-16 El Nino (1H16: -16% YoY). 
  • 9M16 FFB of 1.60m MT (-14% YoY) formed 70% of our FY16E. 3Q’s lower output was more than compensated by higher CPO ASPs of USD611/t (+23% YoY, -2% QoQ).

Raising FY16-17 EPS by 21%/9% 

  • FR’s FFB output traditionally peaks in 3Q. However, given the tapering effects of El Nino, FR has kept its 2016 guidance of a 10% YoY decline in FFB output, in line with our expectation. 
  • We raise FY16-17 EPS by 21%/9% for higher assumptions of: 
    1. net CPO ASPs of USD572/t (+4% for FY16); and 
    2. net PK ASPs of USD458/t (FY16: +39%) and USD390/t (FY17: +16%). 
  • 2016’s PK prices are unsustainable. Risks to our forecasts include CPO price volatility and weather anomalies impacting output.

Maintain 2016 FFB guidance (-10% YoY) 

  • At its briefing, FR maintained its -10% YoY guidance for 2016 FFB nucleus output, as it sees a gradual tapering of El Nino’s impact. This implies that FFB output could be flat to marginally higher QoQ in 4Q16. Its view is in line with other industry experts’ guidance of higher Indonesian FFB output and contrasting weak 4Q16 output in Malaysia. As a result, FR’s distribution ratio this year should be largely skewed towards 2H, estimated at 40:60 for 1H:2H.
  • Our 2016-18 FFB nucleus output forecasts of 2.29m / 2.90m/ 3.26m MT translate into -10% / +26%/ +13% YoY changes. We are anticipating a strong recovery in 2017 after El Nino. Beneficiary rainfall has been experienced throughout most oil-palm planting areas in Indonesia since end-2015. This should set the stage for a strong yield recovery from mid-2017 onwards.
  • FR also believes CPO prices will be well supported at current levels till early 2017, before uncertainties set in as Indonesia’s FFB output recovery is expected to be strong from 2Q17. Its price outlook is in sync with ours; we believe 2017 industry-wide CPO prices will average lower to MYR2,400/t from an estimated MYR2,550/t in 2016.

Expect one-off tax revaluation adjustment in 4Q16 

  • Our revised EPS for FY16 has yet to factor in potential one-off tax credits for recognition in 4Q16. These credits are special tax incentives for fixed-asset revaluation in Indonesia. Their quantum remains unknown.

Ong Chee Ting CA Maybank Kim Eng | 2016-11-10
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 1.97 Up 1.800