First Resources - DBS Research 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.

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).

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.

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.

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 | http://www.dbsvickers.com/ 2017-02-28

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.150 Down 2.190