First Resources (FR SP) - DBS Research 2017-08-14: Strengthening CPO Yield Outlook Provide Earnings Support

First Resources (FR SP) - DBS Vickers 2017-08-14: Strengthening CPO Yield Outlook Provide Earnings Support FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Strengthening CPO Yield Outlook Provide Earnings Support

  • 2Q17 earnings largely in line with our estimate.
  • Double digit y-o-y output growth on recovering yields.
  • Stronger CPO output will support 3Q/4Q earnings performance.
  • Maintain BUY rating with TP of S$2.13.

What’s New 

2Q17 earnings largely in line with our estimate. 

  • 2Q17 EBITDA and net profit after tax (NPAT) reached US$44.1m (+0.6% y-o-y, -44.1% q-o-q) and US$23.1m (-11.4% y-o-y, -52.2% q-o-q) largely in line with our and consensus estimates. 
  • Lower overall average selling price (ASP) and sales volume q-o-q were the key reasons for the weaker earnings growth momentum and profitability performance vs. 1Q17, despite FR’s strong y-o-y overall production performance during the quarter.

Revenue performance supported by strong operational performance. 

  • FR booked revenue of US$134.6m (-1% y-o-y, -31% q-o-q) in 2Q17, also largely in line with our estimate.
  • Sales volume of Crude Palm Oil (CPO) and Palm Kernel (PK) posted strong y-o-y recoveries on yield expansion post El Nino effect last year and expansion of mature estates (in terms of hectares), despite the lower q-o-q trend, mainly on lower working days due to Lebaran festive season.
  • CPO and PK sales volumes reached 148.5k MT (+14.5% y-oy, -10% q-o-q) and 33.8k MT (+16.5% y-o-y, -17% q-o-q) respectively, which sent refinery and processing sales volume to 191k MT (+6.4% y-o-y, -24.2% q-o-q). CPO sales volume expansion y-o-y was driven by higher production, which implies CPO yield of 1.7MT/ hectare in 1H17, from 1.5MT/hectare in 1H16, supported by maturing trees amounting to 16.6k hectares.

Overall ASP performance tracked the global CPO and PK price movements. 

  • Implied refinery and processing products’ ASP reached US$670 per MT (+5% y-o-y, -7% q-o-q) following the implied CPO ASP of US$621 per MT (flat y-o-y, -2% q-o-q).


Strengthening yield outlook in 2H17 will support earnings performance. 

  • The seasonal pattern of strengthening yields in 3Q and 4Q should support FR’s earnings performance, supported by the stabilising CPO price outlook post its recovery in 2Q17, due to CPO price competitiveness vs.
  • other edible oils mainly the soybean oil. Stronger yield outlook means better economies of scale, and we may see the better profitability performance vs. 1H17’s.

We like FR’s organic growth prospects. 

  • We believe FR’s young trees will continue to boost CPO yield and drive CPO volume growth. Higher CPO yields from the maturing trees should improve ROIC and profitability on the back of a better operating scale, and lead to a strong and sustainable earnings growth momentum. 
  • 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.


  • We employed DCF methodology (rolled forward to FY18F base year) to arrive at FR’s fair value of S$2.13/share (WACC 11.8%; TG 3%) . 
  • We believe the counter’s current valuation has yet to price in FR’s strong earnings growth potential.

William SIMADIPUTRA DBS Vickers | 2017-08-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.13 Down 2.13