First Resources - DBS Research 2017-11-15: Bright Outlook In 2018

First Resources - DBS Vickers 2017-11-15: Bright Outlook In 2018 FIRST RESOURCES LIMITED EB5.SI

First Resources - Bright Outlook In 2018

  • First Resources' 3Q17 earnings affected by inventory buildup.
  • Operating margin still expanded q-o-q in 3Q17 – reflecting strong core operational performance.
  • Projecting 18% y-o-y earnings growth in 2018.
  • Maintain BUY rating with TP of S$2.18.



3Q17 earnings affected by inventory timing - retain our bullish view for FY18 and beyond. 

  • First Resources (FR)’s 3Q17 earnings of US$31.9m (-11% y-o-y, +38% q-o-q) was affected by 33k MT of inventory buildup. This resulted in 9M17 COGS being 4% ahead our estimate, despite top line and operational performance tracking our forecast. 
  • We have lowered our FY17F earnings by 12% to account for the inventory item. We lowered our FY18F earnings slightly by 4% and retained our bullish earnings growth assumption of 18% y-o-y to US$174m in 2018 due to 9.1% higher CPO output to 813k MT, and operational efficiencies.


Where we differ: We like FR’s organic growth prospects. 

  • We believe First Resources’ young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on upcoming maturing trees will improve FR’s ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead. 
  • First Resources’s aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong volume and earnings growth in FY18F.


Potential Catalyst: consistent earnings delivery. 

  • We believe consistent earnings delivery should move First Resources’ stock price higher.
  • Moreover, stabilising CPO price outlook will mean that FR’s earnings growth will be driven by volume and CPO yield expansion.


Valuation

  • We employed DCF methodology (FY18F as base year; WACC 11.8%; TG 3%) to arrive at a slightly higher fair value of S$2.18/share after imputing our earnings forecast adjustments.


Key Risks to Our View


  • CPO output may affect CPO price trend. Stronger than expected yield across Indonesia and Malaysia may pressurise CPO price trends next year.



WHAT’S NEW - Strong earnings outlook in 2018 


3Q17: Inventory buildup affected 3Q17 earnings performance 

  • First Resources (FR)' 3Q17 earnings of US$31.9m (-11% y-o-y, +38% q-o-q), slightly below our forecast, but largely in line with the consensus. Earnings was affected by 33k MT (net) of CPO inventory buildup, which also resulted in higher than expected cost of sales in the quarter, despite top line and overall operational performance tracking our forecast.
  • We estimate the inventory buildup added US$24m to 9M17 COGS – 4% higher than our estimate. Inventory adjustments do take place in CPO plantation business due to sales recognition timing. The rest of the cost of sales components were on track with our forecast.
  • First Resources' core operational performance remains solid as seen in EBIT and EBITDA of US$53.1m (-17% y-o-y, +27% q-o-q) and US$69m (-11% y-o-y, +21% q-o-q) respectively in 3Q17, largely in line with our forecast. The trend is in line with the strong q-o-q rebound for revenue and CPO output.
  • Revenue in 3Q17 reached US$137.4m (-9% y-o-y; +2% q-o-q) due to high base effect in 3Q16 from the ASP component, in line with our projection. CPO sales volume grew strongly 26% q-o-q to 187.5k MT (+12% y-o-y), despite 7% q-o-q weaker CPO ASP of US$576 per ton (-6% y-o-y).
  • The strong CPO sales volume trend in 3Q17 was in line with FR’s CPO production trend. CPO production reached 194k MT (+6% y-o-y, +35% q-o-q) as a result of seasonally high output in 2Q17, coupled with 11.9k ha of additional mature areas this year.


Earnings revision : Earnings adjustment in FY17 mainly to adjust for inventory.

  • We lowered our FY17 earnings by 12% to adjust for the inventory item in 3Q17. Our FY17F earnings are now in line with the consensus forecast. No further changes to FR’s operational assumptions at this point, given its strong achievement in 3Q17 on CPO output growth and operational cost structure.
  • We lowered our FY18F earnings slightly by 4% in FY18 to US$174m (+18% growth y-o-y) , and retain our FY19 earnings at US$192m (+15% growth y-o-y) respectively. The adjustment consists of higher financing cost as we believe that FR would need to set aside some funds for its capital expenditure needs in 2018. 
  • Beyond financing cost, our earnings forecast still reflects our view that FR’s young trees will continue to boost FR’s CPO yield and drive CPO volume growth as seen in its 3Q17 performance. Moreover, higher CPO yield on upcoming maturing trees will improve the company’s ROIC and profitability on the back of better operational of scale, resulting in strong earnings growth momentum ahead. 
  • FR’s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to FR’s strong volume and earnings growth in FY18F.


Rating and valuation : Maintain BUY with a slightly higher TP of S$2.18 

  • We believe the market has priced in the 3Q17 inventory item, as reflected in their conservative earnings forecast for 2017.
  • Going forward, we expect FR to deliver stronger earnings growth momentum which will be the key share price driver. Moreover, FR’s operating margin had expanded q-o-q, reflecting its solid core operational performance, which dictates share price direction.

We retain our BUY rating with TP of S$2.18. 

  • Our TP implies FY18F P/E of 14.5x, which we believe is attractive since it is lower than its 5-year average P/E multiple of 17.8x. 
  • Beyond adjustments made in FY17/18, we slightly revised up our long term CPO output assumption by 2% p.a. in FY20F-25F supported by our confidence on its long term productivity outlook.




William Simadiputra DBS Vickers | http://www.dbsvickers.com/ 2017-11-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.18 Up 2.130



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