First Resources Ltd - CIMB Research 2017-08-14: Weaker Qoq Earnings Due To Lower Output

First Resources Ltd - CIMB Research 2017-08-14: Weaker Qoq Earnings Due To Lower Output FIRST RESOURCES LIMITED EB5.SI

First Resources Ltd - Weaker Qoq Earnings Due To Lower Output

  • First Resources' 1H17 core earnings were broadly in line, making up 42% of our full-year forecast.
  • FFB output surged 27% yoy to a new record high in 1H, as El Nino effect waned.
  • This, coupled with higher CPO prices and refining margins, lifted 1H earnings.
  • However, 2Q net profit fell 50% qoq due to lower output (-13.1%).
  • Maintain Add with an unchanged target price of S$2.32 (13x FY18F P/E).

1H17 core net profit broadly in line with our estimate 

  • First Resources’ (FR) 1H17 core net profit was in line with our forecast and consensus.
  • 1H core net profit made up 42% of our and 44% of consensus full-year forecasts. We expect stronger earnings in 2H, which is seasonally the higher production period for the group, while costs are typically lower as 60-70% of fertiliser costs are captured in 1H. 
  • As expected, an interim dividend of S$0.0125 was declared, which is equivalent to 20% of interim net profit.

Weaker qoq earnings due to lower output and processing margin 

  • FR’s 2Q17 core net profit (excluding forex gains) fell by 50% qoq to US$23m due to lower plantation and processing earnings. Plantation earnings were impacted by lower FFB output (-13% qoq) and palm kernel prices (-15% qoq). 
  • Processing EBITDA fell 32% qoq due to weaker refining and processing margin of US$20/tonne in 2Q17 vs. US$29/tonne in 1Q17. 
  • Yoy, core net profit fell 9.3% due to higher effective tax rate of 34% in 2Q17 vs. 24% in 2Q16 given the effects of withholding taxes.

FFB output in 1H17 set a new record high 

  • Plantation EBITDA jumped 59% yoy in 1H17, due mainly to higher CPO selling prices and FFB output. ASP achieved for CPO grew by 15.9% to US$629 per tonne. 
  • FFB production from its nucleus estates rose 27% yoy in 1H17, which represents a new record high output for FR. This was due to an increase in mature areas and higher FFB yield as El Nino effects waned.

Net draw down of stocks boosted CPO sales volumes 

  • CPO sales volumes grew by 11.3% yoy to 313,536 tonnes, higher than the group’s CPO output of 304,971 tonnes in 1H17. This was due to a higher net inventory draw down of 46,000 tonnes of palm products in 1H17 vs. 29,000 tonnes in 1H16.

Downstream division returned to profitability 

  • Refinery and processing EBITDA turned around to post a profit of US$11.1m in 1H17 against a loss of US$4m in 1H16 due to higher refining margins. 
  • We estimate that EBIT per tonne for this division was US$25 in 1H17 due to a favourable profit margin.

Outlook for the rest of 2017 

  • The group expects FFB yield to strengthen in 2H17 due to continued recovery from the effects of El Nino and the typical seasonality pattern in production. 
  • It expects the demand for palm oil to remain stable due to palm oil’s attractive pricing against other edible oils.

Maintain Add due to its attractive estates profile 

  • We maintain our earnings forecasts and target price of S$2.32 (based on an FY18F P/E of 13x, its average historical P/E). 
  • We maintain our Add call due to the group’s estates’ young age profile (average age of 11 years and 42% of planted estates less than eight years old). 
  • Key risks are lower CPO prices and production.

Ivy NG Lee Fang CFA CIMB Research | 2017-08-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.320 Same 2.320