First Resources - DBS Research 2017-02-28: Strong earnings outlook

First Resources - DBS Vickers 2017-02-28: Strong earnings outlook FIRST RESOURCES LIMITED EB5.SI

First Resources - Strong earnings outlook

  • 4Q16 earnings slightly below on higher borrowing costs, non-controlling interests.
  • FY17F FFB output growth guided at 15%.
  • FY17F/18F earnings trimmed by 2% each on higher upkeep costs.
  • TP adjusted to S$2.15 – reiterate BUY.

Consistent delivery. 

  • We expect First Resources (FR) to book a strong 54% earnings growth this year – premised on volume recovery. 
  • 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 and thin refining margins. 
  • In this report, we reiterate our BUY rating on 15% potential upside (excluding 2% dividend yield).

FY17F/18F earnings trimmed by 2% each. 

  • FR booked core 4Q16 earnings (excluding impact from biological asset gains/losses) of US$48.1m (+176% y-o-y; +34% q-o-q), bringing FY16 core earnings to US$115.5m – slightly below US$120.5m forecast. 
  • The group’s core FY16 operating profit of US$194.5m – was slightly ahead of the US$190.8m expected; but was more than offset by higher-than-estimated borrowing costs and non-controlling interests. 
  • We lowered FY17F/18F earnings by 2% each; on account of higher expected labour unit costs and feedstock (FFB of fresh fruit bunch and CPO or crude palm oil) costs. TP is adjusted slightly to S$2.15.

Volume growth to decelerate from 2019. 

  • 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$2.15/share (WACC 11.4%; TG 3%) – adjusted from S$2.19 previously. 
  • We believe the counter’s strong expected earnings growth has not been priced in.

Key Risks to Our View

  • There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.1m MT) this year. 
  • CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop. 
  • Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.

Ben Santoso DBS Vickers | 2017-02-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.150 Down 2.190