First Resources - DBS Research 2017-02-17: Aggressive recovery

FIRST RESOURCES LIMITED EB5.SI

First Resources - Aggressive recovery

We expect First Resources (FR) to book a strong 48% sequential recovery in 4Q16 earnings – premised on better ASP and seasonal yield uptick.
We also expect relatively strong crude palm oil (CPO) and palm kernel (PK) average prices to continue this year; partly offset by slightly lower expected biodiesel output.

We tweaked our earnings projections to account for higher CPO/PK price forecasts, as well as slightly faster recovery in FY17F FFB yield than previously anticipated.
External FFB purchases were also revised higher from FY17F – on expectations of FFB yield recovery from adverse impact of 2015 El Nino – to optimise the group’s mill utilisation rate.
FR’s CPO output is consequently raised by c.1% p.a. from previous forecasts

FR’s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to the group’s strong volume and earnings growth through FY18F.
Subject to opportunistic acquisitions, we expect FR’s output growth to decelerate from FY19F, as new planting is forecast to moderate from FY16 onwards (excluding new acquisitions).

We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$2.19/share (WACC 11.7%, Rf 8.4%; Rm 13.3%; β 1.0x; TG 3%) – raised from S$1.90 previously.
We believe the counter’s strong expected earnings growth has not been priced in.

FR’s share price is linearly driven by CPO price expectations and partly by refining/biodiesel margins. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year.
CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina.
Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-02-17

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