First Resources - RHB Invest 2017-08-15: Valuations To Follow CPO Price Direction

First Resources - RHB Invest 2017-08-15: Valuations To Follow CPO Price Direction FIRST RESOURCES LIMITED EB5.SI

First Resources - Valuations To Follow CPO Price Direction

  • Despite First Resources (FR)’s stronger-than-expected earnings and our upward forecast revision, we believe the stock’s valuations will remain suppressed due to the negative CPO price outlook. 
  • We believe FR will no longer trade at similar valuations as its Malaysian mid-cap peers, but expect valuations to return to its historical mean of 13x. Assuming a 2018F P/E of 13x implies an EV/ha of USD13,000, which is in line with regional peers’ USD10,000-15,000/ha. 
  • No change to our NEUTRAL recommendation with a reduced TP of SGD2.00 (from SGD2.05, 9% upside).

FFB growth to moderate going forward. 

  • First Resources (FR) is maintaining its +15% YoY FFB output guidance for FY17F, despite recording +27% growth in 1H17. 
  • Management highlighted that 3Q output will likely be lower than 2Q, based on numbers in July and August, while the peak quarter is likely to be in 4Q17. Despite this, we raise our FFB growth forecast to 17.4% (from 14.8%) for FY17, but maintain our 7-10% growth projection for FY18F-19F.
  • Management expects current CPO prices to be supported in the short term, due to lower-than-expected production output it is seeing at its Riau estates. However, come 2H18, production is likely to see another strong recovery, post the 24-month delay impact from El Nino, which would affect prices. 
  • We adjust our USD-based CPO prices to USD612/tonne for FY17F (from USD584) to reflect recent revisions to our in-house USD/MYR exchange rate forecasts.

We estimate unit costs fell by 12% in 1H17. 

  • This was due to slower fertiliser application in 2Q17, as FR only applied 50% of its FY17 fertiliser requirements, as opposed to 60-70% normally. 
  • Fertiliser application is expected to play catchup in 3Q17, as the bulk of the remaining 50% will be applied. As such, we are maintaining our cost assumptions of USD220-230/tonne for FY17.

Refining division still profitable. 

  • In 2Q17, FR’s refinery operated at 70-80% utilisation (down from 85% in 1Q17), with EBITDA margins of 3%. We project refinery margins to remain at 3-5% for the rest of the year.

Biodiesel slow delivery in 2Q. 

  • In 2Q, FR delivered some 10,000 kilolitres of biodiesel to Pertamina, with an additional 10,000 delivered in Jul-Aug. This means FR should be on track to deliver its contracted 38,000 kilolitres by Nov 2017. Although pricing for biodiesel has been reduced to CPO+USD100/tonne effective May, FR is still recording positive margins from these operations.
  • All in, we upgrade our FY17F-19F earnings by 5-14%, after taking into account the higher FFB output assumption and USD exchange rate revision.

NEUTRAL maintained. 

  • However, we lower our TP to SGD2.00 after rolling forward our target P/E to 2018 (from 2017) and reducing our target P/E to 13x (from 17x). 
  • We believe valuations will revert to its historical mean of 13x given the weaker CPO price outlook, and the stock will no longer trade in line with its mid-cap Malaysian peers. This 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 | 2017-08-15
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.00 Down 2.050