First Resources Ltd - CIMB Research 2017-05-14: Production Surges As El Nino Impact Fades

First Resources Ltd - CIMB Research 2017-05-14: Production Surges As El Nino Impact Fades FIRST RESOURCES LIMITED EB5.SI

First Resources Ltd - Production Surges As El Nino Impact Fades

  • The group maintains its guidance for FFB output to grow by 15% in 2017.
  • 2Q17’s production is set to be weaker than 1Q17’s due to the shift in peak production season.
  • It is maintaining its cost of production target of US$200-220 per tonne for 2017.
  • We are neutral after the teleconference and expect 2Q earnings to be lower qoq.
  • Maintain Add with an unchanged target price of S$2.32 (13x FY18 P/E).

Key takeaways from results teleconference 

  • The main takeaways from FR’s 1Q17 results teleconference are: 
    1. it maintains its guidance for FY17 FFB output to grow by 15%; 
    2. it projects 2Q17’s production as weaker than 1Q17’s, before recovering in 2H17; 
    3. it keeps its cost of production guidance of US$200-220/tonne and new planting target of 1,000-2,000 ha; 
    4. it expects lower CPO prices to persist as palm oil production continues to recover; and 
    5. its 1Q17 net profit benefitted from net drawdown of 46k tonnes of palm oil.

2Q’s output likely to be lower than 1Q’s 

  • The group’s guidance of a 15% rise in FFB output for FY17 is broadly in line with our assumption of a 17% improvement in output. 
  • 1Q production grew at a higher rate of 42%, due partly to low base effect. It expects 2Q production to be lower qoq though higher yoy, due to a shift of peak production season to 4Q16 vs. 3Q16, 
  • We gather that weather has been generally favourable across all of its estates and the El Nino impact has tapered off. 
  • For 1Q17, the group derived 77% of its output from its Riau estates, 22% from West Kalimantan and 1% from East Kalimantan estates.

Higher production helps to lower costs of production 

  • FR maintained its guidance for cash costs of production for nucleus CPO (ex-mill) at US$200-220 per tonne in 2017, against the US$215 per tonne achieved in 2016. We gather that minimum wages in the three regions where it has operations rose by around 10% in 2017, However, this is partially offset by lower fertiliser costs in 1H17 against 2016. 
  • The group’s fertiliser costs are front-loaded in 1H and it typically applies 30-35% of its full year fertiliser requirements in 1Q.

Other notable takeaways 

  • The group planted 231ha of oil palm estates in 1Q17, broadly in line with its FY17 new planting target of 1,000-2,000ha. It planted 1,116 ha of palm oils and 168 ha of rubber in 2016, bringing total planted oil palm estates to 208,691 ha. FR drew down 46,000 tonnes of inventory from both its estates and refinery in 1Q17. We think this boosted 1Q17 earnings. 
  • FR said the higher downstream profit of US$7.3m (+138% yoy) in 1Q17 was due to high utilisation rate (1Q17 :85%) at its facilities and lower raw material costs.

Outlook for 2Q17 

  • We are projecting a lower 2Q17 net profit due to guidance of lower output and absence of further stock draw-down. On top of these, CPO prices in Indonesia (fob) have declined from US$742 per tonne in 1Q17, to US$674 per tonne in April and US$688 per tonne, currently. 
  • Costs of production may be higher due to lower output and 17,000 ha of new mature areas coming on stream in 2017 

Maintain earnings forecasts and target price 

  • We maintain our earnings forecasts and target price of S$2.32 (based on FY18 P/E of 13x, its average historical P/E). 
  • We keep our Add call due to the group’s estates’ young age profiles (42% of planted estates below seven years old). 
  • Key re-rating catalyst is stronger-than-expected earnings. 
  • Key risks are lower CPO prices and production.

Ivy NG Lee Fang CFA CIMB Research | 2017-05-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.320 Same 2.320