First Resources - RHB Invest 2017-12-13: Increasing CPO Price Estimates

FIRST RESOURCES LIMITED EB5.SI

First Resources - Increasing CPO Price Estimates

We believe that downside risks for CPO prices would not be significant from hereon and are likely to remain relatively range-bound, ie at MYR2,300-2,700/tonne. However, we lift our average price per tonne assumptions to MYR2,550 (from MYR2,400) for 2018, and to MYR2,700 (from MYR2,500) for 2019.
We expect the growth in CPO output in both Malaysia and Indonesia to slow down in 2018, from the estimated 12% and 21% YoY jump respectively in 2017.
We raise our FY18F-19F earnings by 3-10% and maintain our NEUTRAL call with a SGD2.03 TP (9% upside).

While we continue to expect CPO output to grow, particularly in parts of Malaysia where recovery has been slower, much of this has been already reflected in CPO prices.
CPO prices fell from a high of MYR3,348/tonne in Feb 2017 to a low of MYR2,400/tonne in Dec 2017, and is currently hovering at these low levels.

However, we lift our average price per tonne assumptions to MYR2,550 (from MYR2,400) for 2018, and to MYR2,700 (from MYR2,500) for 2019. We expect the growth in CPO output in both Malaysia and Indonesia to slow down in 2018, from the estimated 12% and 21% YoY jump respectively in 2017.
Given the seemingly delayed CPO production peak season in Malaysia in 2017, it is likely that part of the peak season would overflow into 1Q18. This could result in Malaysia recording CPO output growth of 5-7% YoY in 2018F.
Indonesia, however, seems to have hit its peak already in Oct/Nov 2017, which means the production cycle has normalised somewhat – resulting in CPO output growth of 3-5% YoY for 2018F.

Most weather models acknowledge that if the current progression continues, 2017-2018 would be considered a La Niña event. The current probability of La Niña occurring in end-2017 is now at 75%. However, climate models suggest that any event is likely to be weak and short-lived, ie if it is confirmed, it would be very different from the strong 2010-2012 La Niña.
Nevertheless, we believe a mild La Niña would still have an impact on vegetable oil supply (although somewhat muted). This could affect sentiment and, therefore, prices positively by 8-12%, based on historical events.

We lift FY18F-19F earnings by 3-10% to reflect our higher CPO price assumptions. We believe that, even with a mild La Niña, this would provide some support for CPO prices in 2018, while production should face another cyclical downturn in 2019 – which would boost prices again.
We highlight the risk of a further strengthening of MYR past our MYR4 per USD projection for 2018, which would result in lower CPO prices.
Despite the positive earnings revision, our TP drops to SGD2.03 (from SGD2.15), based on an a lower 2018F P/E of 12x (from 13x), in line with the recent sector peer shrinkage. This implies an EV/ha of USD13,000, in line with that of its peers’ range of USD10,000-15,000/ha.
First Resources’ extensive exposure to Riau (67%) puts it at risk, in the face of weak weather-led productivity, while valuations look fair at current levels.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-13

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.03 Down 2.130