First Resources - DBS Research 2017-05-15: Strong 1Q17 Performance To Ease In 2Q17

First Resources - DBS Vickers 2017-05-15: Strong 1Q17 Performance To Ease In 2Q17 FIRST RESOURCES LIMITED EB5.SI

First Resources - Strong 1Q17 Performance To Ease In 2Q17

  • 1Q17 earnings above expectation on higher volume and ASP.
  • FY17F FFB output growth guidance maintained at 15%.
  • FY17F/18F earnings unchanged.
  • TP unchanged at S$2.15 – BUY rating reiterated.

What’s New 

1Q17 earnings better than expected 

  • First Resources (FR) booked 1Q17 earnings of US$48.5m (+741% y-o-y; +1% q-o-q) – representing 27% of our full-year forecast; slightly ahead of our expectations on annualised basis. The strong y-o-y performance was principally driven by both higher sales volume and price across all segments. The flat q-o-q earnings growth was driven by lower CPO and PK sales volume due to seasonality lower production combined with higher FFB sales. This was neutralised by lower SG&A expenses and forex gains.
  • 1Q17 EBITDA for Refining & Processing returned to the positive at US$7.3bn from US$8.1bn losses in 4Q16, thanks to better prices (+6%) and sales volume (+9%). EBITDA margin for Plantations also increased, to 57.9% from 26.3% in 1Q16; as implied CPO ASP rose 34% y-o-y to US$635/MT. 
  • Overall, gross profit came in at US$92m (+164% y-o-y; -4% q-o-q), which translated to gross profit margin (GPM) of 47% - down from 55% in 4Q16 – as more FFB were being sold directly.
  • For the quarter, FR’s top line expanded 11% q-o-q to US$194m, driven by a fourfold jump in Refining and Processing business. 
  • The group’s cost of sales increased at a faster rate of 28% q-o-q, which implied that feedstock for the Refining and Processing (i.e. CPO) were mostly outsourced.
  • For the quarter, FR’s cash flow from operations amounted to US$66m. This was higher than reported net profit due to both shorter inventory days and longer payables but offset by double receivable days due to timing difference of shipment. Accordingly, 4-quarter rolling cash conversion cycle was calculated at 61 days – shorter than the 77 days recorded in the previous quarter.
  • As at end-March 2017, FR’s net gearing ratio was 16.1% - down from 21.5% in December 2016 – mainly on the back of US$45m q-o-q increase in cash balance.

Recovering FFB yields in 1Q17 

  • FR’s own fresh fruit bunch (FFB) output for the quarter rebounded 44% y-o-y to 0.7m MT, as the lagged impact of 2015 El Nino dissipated. The production was still 18% behind last quarter due to seasonality, For the quarter, FFB yield had rebounded to 4.2MT/ha from 3.2MT/ha in 1Q16 – but still below the 5.6MT/ha in 4Q16. FFB output from smallholders had likewise rebounded 56% y-o-y.
  • This translates to 1Q17 CPO output of 161,000 MT (+34% y-o-y; -22% q-o-q).


Production slowdown in 2Q17 before rebounding in 2H17 

  • The group expects production to ease in the coming quarter before rebounding in 2H17 on seasonality. The group is reiterating its 15% FFB production growth guidance for the year. 
  • We maintain own FFB production target of 2.741m MT – representing a 16% y-o-y increase.

Lower biodiesel allocation to Pertamina 

  • As part of the government’s biodiesel programme, FR had been allocated to deliver 38,360kl of biodiesel from May through October 2017 – down from 61,738kl in the November 2016 – April 2017 allocation revision. The total biodiesel allocation is cut by c.10% on the back of the ongoing rectification of procedures.

Slower-than-expected expansion 

  • The group’s planted area had expanded 231ha in 1Q17 out of its full-year target of 1,000-2,000ha. Given management guidance, we are maintaining our forecast of 2,000ha.


  • Despite the stronger-than-expected 1Q17 performance, we maintain our forecast for FY17. 
  • We expect earnings to subsequently ease in 2Q17 on seasonally lower production volume and weaker-than-expected CPO ASP. We also expect refining utilisation rate to ease on lower feedstock availability.
  • We employed DCF methodology to value FR. Based on our current forecast, FR’s fair value is estimated at S$2.15 (WACC 11.4%; TG 3%). Our BUY rating is maintained for 10% upside to our TP.

Singapore Research Team DBS Vickers | 2017-05-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.150 Same 2.150