First Resources - RHB Invest 2017-05-15: Expects Lower CPO Prices To Persist

FIRST RESOURCES LIMITED EB5.SI

First Resources - Expects Lower CPO Prices To Persist

FR expects its YoY FFB growth to moderate from the 42% recorded in 1Q17, to end the year at around 15%. Output in 2Q17 is expected to be weaker than that of 1Q17.
Management anticipates the low CPO prices to persist, particularly as it expects supply to recover more strongly in 2H17.

We upped our forecasts to impute higher FFB output and refining margins which resulted in a higher TP of SGD2.05 (from SGD1.80) but maintained our NEUTRAL recommendation as we believe valuations are fair at the current levels.

First Resources (FR) is maintaining its +15% YoY FFB output guidance for FY17F. Management highlighted that the 2Q output will likely be lower than in 1Q, based on numbers in April and May. However, output could improve again in 2H17, on the back of the peak production period.
We tweak our FFB growth forecast to 15% (from 13.5%) for FY17, but maintain our 9-10% growth projection for FY18-19F.
Management expects the lower CPO prices to persist on improving supply prospects and muted demand, particularly as production continues to recover in 2H17.

Management did not guide on profitability of the downstream division going forward, but we believe this would likely remain in the black given the reducing trend of feedstock prices. In 1Q17, FR’s refinery operated at 85% (up from 78% in FY16).
We have adjusted our refinery margins upwards to reflect similar margins of 4-5% for the rest of the year.

FR’s biodiesel operation continues to run at about 30-35% utilisation rate, and is still profitable. For the May to November 2017 period, FR has contracted to deliver 38k kilolitres to Pertamina, 31% lower than its Oct 16-Aprl 17 contract of 55k kilolitres and 42% lower than 2016’s May-Oct contract of 66k. The lower contracted volume is due to the continued expansion of biodiesel capacity in the country, which stands at 10m tonnes now.
FR is still supplying to Pertamina at the old pricing of CPO+USD125/tonne, as the new pricing structure of CPO+USD100/tonne has not taken effect yet.
Despite the upcoming change in pricing structure, management believes it would still be able to record positive margins from these operations.

All in, we up our FY17-19F earnings by 7-14.5%, after taking into account the higher FFB output and positive refining margins.

We raise our TP to SGD2.05, which is based on an unchanged 17x P/E on 2017 earnings and implies an EV/ha of USD13,000, which is in line with peers’ USD10,000-15,000/ha.
FR’s large exposure to Riau (67%) puts it at risk in the face of weak weather-led productivity, while valuations look fair at current levels.
Weather, exchange rates, and global supply and demand dynamics of edible oils are key risks.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-15

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.05 Up 1.800