First Resources (FR SP) - UOB Kay Hian 2017-10-26: 3Q17 Results Preview ~ Expect Stronger Qoq And Yoy Performance

First Resources (FR SP) - UOB Kay Hian 2017-10-26: 3Q17 Results Preview ~ Expect Stronger Qoq And Yoy Performance FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - 3Q17 Results Preview ~ Expect Stronger Qoq And Yoy Performance

  • First Resources (FR) reported better qoq and yoy FFB nucleus production in 3Q17 on the back of a yield recovery and supported by new mature areas. 
  • We forecast core net profit of US$33m-37m for 3Q17. We expect better qoq earnings on the back of higher production and higher contribution from biodiesel sales, while yoy earnings could come in flat or marginally higher as the higher yoy production yoy would be partly offset by lower CPO ASP. 
  • Maintain HOLD. Target price: S$1.95. Entry price: S$1.75.



WHAT’S NEW


3Q17 FFB production within expectation. 

  • First Resources’ (FR) 3Q17 production statistics came in within our expectations. 
  • We forecast core net profit of US$33m-37m for 3Q17 (2Q17: US$23.8m, 3Q16: US$36.0m). We expect a stronger qoq performance on the back of higher production, while yoy earnings could come in flat or marginally higher as the better production yoy would be partly offset by lower CPO ASP. 
  • First Resources is targeting to release 3Q17 results on 13 Nov 17 after market close.


STOCK IMPACT


FFB production improved qoq and yoy in 3Q17. 

  • Fresh fruit bunch (FFB) nucleus production jumped 36.0% qoq and 7.9% yoy in 3Q17, supported by a recovery in FFB yield to 4.8 tonnes/ha in 3Q17 from 3.5 tonnes/ha in 2Q17. However, we note FFB yield for 3Q17 is on a par with 3Q16’s. Thus, the yoy FFB production growth was mainly driven by the increase in mature areas.

On track to meet our FFB production growth forecast of 18% yoy for 2017. 

  • For 9M17, FFB nucleus production reached 1.9m tonnes (+19.0% yoy), accounting for 68% of our 2017 estimate. We expect 4Q17 FFB nucleus production to fill up the remaining 32% of our 2017 estimate. Hence, we believe FR can meet our FFB production forecast of 2.8m tonnes for 2017.

CPO production improved qoq and yoy, in line with FFB production trend but at a smaller quantum. 

  • CPO production rose 34.9% qoq and 6.3% yoy in 3Q17. The quantum of increase in CPO production was lower than that for FFB production (+35.7% qoq, 7.6% yoy) mainly due to the decline in the oil extraction rate (OER) to 22.0% in 3Q17 (2Q17: 22.2%, 3Q16: 22.1%).

Expect stable downstream operations in 3Q17. 

  • We expect stable refining earnings in 3Q17 (likely to rise yoy but 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.

Biodiesel contribution back on track. 

  • Biodiesel delivery volume has returned to normal levels 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.

Marginal qoq and yoy declines in CPO ASP could drag performance. 

  • Dumai/ Belawan CPO ASP was 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 engaged in forward sales but the volume is undisclosed. Thus, FR is unlikely to benefit from the recent improvement in CPO prices.


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 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’ (FR) 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 contribute to FR’s earnings.




Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-26
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.950 Same 1.950



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