First Resources - RHB Invest 2016-11-11: Improved Outlook, But Fair Valuations

FIRST RESOURCES LIMITED EB5.SI

First Resources - Improved Outlook, But Fair Valuations

First Resources is maintaining its FFB output projections for the year, which we believe is conservative, given our expectations of a stronger 4Q16.
We up FY16 earnings forecasts by 14.3% to reflect higher FFB output and lower tax rates going forward. Despite our more positive view on the company now, we believe valuations are fair at current levels, already reflecting the stronger earnings growth outlook.

No change to our Neutral recommendation, with a higher TP of SGD1.80 (from SGD1.73, 1% downside).

First Resources is maintaining its -10% YoY FFB output guidance for FY16. This implies a flattish QoQ output in 4Q16.
Although our -9.9% FFB output projection is in line with management’s expectation, we believe 4Q16 could turn out stronger vis-à-vis 3Q. As such, we are revising our FFB output forecast to reflect a 7% YoY decline in FY16, followed by an unchanged 7-9% growth for FY17F-18F.
Management was not able to give any guidance for FY17 output yet, other than state its expectation of a strong recovery coming from 2Q17 onwards.

Its effective tax rate in 3Q16 was at 32.6%, due to some adjustments made to withholding tax and deferred taxes. However, this is expected to normalise, resulting in lower effective tax rates of 27-28% for FY16F-17F. We have lowered our effective tax rates accordingly.

With higher volumes in 4Q16, we expect the downstream division to remain in the black. In 9M16, the group’s refinery operated at 70% utilisation, while 1H was at 76%.
The biodiesel division is also reaping positive margins, as First Resources has delivered about 90% of its contracted biodiesel output of 66,000 kilolitres to Pertamina for the May to October contract.
Although October is already over, management expects to be able to fulfil the remaining 10% of the contract soon.
For the November to April period, the company has obtained a contract to deliver 55,000 kilolitres of biodiesel to Pertamina, a reduction of 13.6% from the last contract. We understand that the lower allocation is due to the higher number of biodiesel players in the market. .

All in, we revise our FY16F earnings up by 14.3% and our FY17-18 earnings down by 1-3%. This is after taking into account the above mentioned changes to FFB output and effective tax rates.

We raise our TP to SGD1.80, which implies 18x P/E on 2017 earnings and an EV/ha of USD12,000, which is in line with peers’ USD10,000-15,000/ha.
First Resources’ large exposure to Riau (67%) puts it at risk in the face of weak weather-led productivity, while valuations look fair at current levels.
Weather, exchange rates, and global supply and demand dynamics of edible oils are key risks.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-11

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