First Resources (FR SP) - UOB Kay Hian 2017-10-09: Better 2H17 Earnings Reflected In Share Price

First Resources (FR SP) - UOB Kay Hian 2017-10-09: Better 2H17 Earnings Reflected In Share Price FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Better 2H17 Earnings Reflected In Share Price

  • First Resources (FR)’s share price has been stagnant at S$1.85-1.93 since 23 Aug 17. We believe current share price has reflected the better earnings in 2H17. 
  • We are anticipating stronger 3Q17 results on the back of:
    1. higher qoq and yoy FFB production,
    2. higher contribution from biodiesel delivery, and
    3. better yoy refining margins, but partly offset by weaker CPO ASP. 
  • Maintain HOLD. Target price: S$1.95. Entry price: S$1.75.



WHAT’S NEW


Value priced in. 

  • First Resources’ (FR) share price has been stagnant at S$1.85-1.93 since 23 Aug 17. We believe current share price has reflected the better earnings in 2H17. 
  • We understand that First Resources engages in forward sales but the volume is undisclosed. Thus, FR is unlikely to benefit from the recent improvement in CPO prices.
  • Dumai/Belawan CPO prices have rebounded from a low of US$629/tonne on 24 Jul 17 to the recent high of US$716/tonne on 18 Sep 17.

Anticipate a stronger 3Q17 performance. 

  • 3Q17 earnings could likely be stronger qoq and yoy, supported by: 
- Better FFB production qoq and yoy. 
  • We gather that FFB production improved mom in Jul-Sep 17, especially in July, which saw a significant mom increase mainly due to the production spill-over from the Hari Raya break. 
  • On a yoy basis, the higher FFB production was mainly supported by yield recovery and new mature areas.
- Biodiesel contribution back on track. 
  • We understand that biodiesel delivery volume has returned to normal since Jun 17. However, the biodiesel subsidy has been reduced to a pricing formula of CPO base price + US$100/tonne from CPO base price + US$125/tonne since May 17. Although this will affect operating margin, it will still be profitable for FR.
- Higher refining margin yoy… 
  • We expect stable refining earnings in 3Q17 (likely to rise yoy but potentially lower qoq). Refining volume is expected to be higher qoq and yoy on the back of more feedstock available in the market. 
  • Meanwhile, refining margin is expected to be better yoy but lower qoq.
- ...but partly offset by marginal qoq and yoy decreases in CPO ASP.
  • Dumai/Belawan CPO ASP will be marginally weaker qoq and yoy for 3Q17 (-1.5% qoq, -2.6% yoy). Dumai/Belawan CPO prices rebounded from a low of US$629/tonne on 24 Jul 17 to the recent high of US$716/tonne on 18 Sep 17 mainly due to tight stock level.
  • We understand that FR engages in forward sales but the volume is undisclosed. Thus, FR is unlikely to benefit from the recent improvement in CPO prices.


STOCK IMPACT


Other key highlights from recent update:

  • Labour shortage is still manageable. We understand that the labour shortage issue has always been a key problem for plantation companies. Management indicated that the labour shortage is still manageable for First Resources.

Rainfall pattern. 

  • To recap, Riau estates experienced dryer-than-usual weather at end-Jul 17 and Aug 17, but normalised in Sep 17. In mid-Sep 17, Riau estates experienced heavy rainfall. However, we understand that the negative impact is minimal, as the flood waters usually subside within 2-3 days. 
  • On the other hand, Kalimantan estates experience a different rainfall pattern from Riau. Kalimantan has more rainfall in Aug 17 compared with Sep 17. 
  • All in all, rainfall patterns in both regions are considered normal.

Maintain FFB production growth of 18% yoy for 2017. 

  • Our forecast of 18% yoy is higher than management’s guidance of 15% yoy. 
  • We deem management’s guidance very conservative, given that West Kalimantan’s production is expected to show good FFB yield (less impacted by 2015’s El Nino, as it has younger trees). Moreover, there will be 17,000ha of new area coming into maturity in 2017 (10.7% of 2016 mature area), which should provide about 3% FFB production growth for 2017.

Key highlights on historical trend:

  • FFB nucleus production growth driven by improving maturity profile. FFB nucleus production grew at 9-year CAGR of 7.4% for 2007-16 on the back of improving maturity profile. The FFB nucleus production drop in 2016 was mainly due to the lagged impact from the severe drought in 2015.

Average age profile of 11 years. 

  • First Resources had trees with a young age profile averaging 11 years as at Jun 17, of which 26% are in the young age, and will see a significant improvement in yield once they move into prime age.

FFB yield is recovering from low. 

  • FFB yield dipped to 18.7 tonnes/ha in 2013 from 23.0 tonnes/ha in 2012 mainly due to biological stress and dilutive effect from more areas coming into maturity. FFB yield improved to 19.0 tonnes/ha in 2015, and then registered another drop in 2016 due to the lagged impact from the severe drought in 2015. 
  • Moving forwards, we expect FFB yield to recover to 18.0 tonnes/ha in 2017 and 18.9 tonnes/ha in 2018 as the lagged impact from the severe drought is weakening.

Consistently maintains strong EBITDA margin of 44-62% for 2007-16. 

  • First Resources recorded EBITDA margin of 44-62% for 2007-16. By maintaining efficiencies in operations and keeping the cost low, FR has been able to maximise returns and generate strong EBITDA. 
  • We noticed that cash cost per tonne is trending down, from a high of US$255/tonne in 2013 to US$215/tonne in 2016. However, the improvement in cost per tonne was not reflected in EBITDA margin in 2015-16, mainly due to weaker CPO ASP.

Dividend payout of 17-30% for 2008-16. 

  • First Resources has consistently paid out 17-30% of net profit in 2008-16, translating to dividend yield of 1.3-3.3%.


EARNINGS REVISION/RISK


No change to our earnings estimates. 

  • We forecast EPS of 9.1 US cents, 8.7 US cents and 9.9 US cents for 2017-19 respectively.
  • Our weaker earnings estimate for 2018 is mainly due to the likelihood of significantly weaker CPO prices going into 2018 as supply outweighs demand. We forecast CPO prices to average RM2,400/tonne (-8% yoy) for 2018.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of S$1.95, based on 16x 2018F PE, or its 5-year mean PE. Entry price is S$1.75.


SHARE PRICE CATALYST


Better-than-expected CPO prices. 

  • First Resources' earnings are still largely driven by upstream operations and this makes its earnings highly sensitive to CPO prices. Any increase in CPO selling prices from our base case of RM2,600/tonne would be positive to earnings.

Stronger-than-expected FFB production. 

  • Stronger-than-expected production recovery will positively contribute to FR’s earnings.






Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-09
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.950 Same 1.950



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