First Resources (FR SP) - DBS Research 2018-02-28: Sound Operations Spur Rebound In 4Q17 Earnings

FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Sound Operations Spur Rebound In 4Q17 Earnings

First Resources successfully recovered its earnings momentum in 4Q17 after performing relatively weaker in the last quarter due to inventory timing issues. The q-o-q earnings improvement was attributed to the 27.5% q-o-q revenue growth to US$175.2m (flat y-o-y) and margin expansion.
The margin was healthy in 4Q17 due to stable overall operational cost. First Resources successfully kept its profitability in check despite the rainy season, which usually causes supply chain congestion mainly on fruit collection and transport, resulting in higher operational costs. Higher revenue coupled with fixed cost drove the higher margin q-o-q.

First Resources announced final and special dividends of 2.15 Scts and 3.4 Scts respectively, on top of its previous interim dividend of 1.25 Scts. Total dividend of 6.8 Scts (FY16 3.0 Scts) translates into a total dividend payout ratio of 58% vs. 29% in FY16.
The revenue performance was driven by sound operational achievement, attributed to the 2% q-o-q higher crude palm oil (CPO) ASP of US$589 per MT (- 6% y-o-y) and 11% higher CPO sales volume of 207,200 MT (-2% y-o-y).
Total fruit production reached 885,600 MT (+3% y-o-y, +6% q-o-q), driven by own and small holders' estate production expansion, and not so much from third-parties' fruits.

We retain our forecast at this point given that our forecast accounted for 18% y-o-y earnings growth to US$167m (largely in line with consensus), mainly driven by its organic fruit production expansion.
First Resources stated in its presentation that the fruits production volume will continue to grow in 2018. Moreover, CPO price will be supported by its pricing competitiveness vs. other edible oils, mainly soybean oil – underpinning its earnings performance this year.
Beyond the operational aspect, First Resources highlighted that the group's effective tax rate may be higher in 2018 from withholding tax expense on dividend income received from foreign subsidiaries – still related to its 2017 special dividend. We will classify the tax expenditure related to special dividend as one-off item in 2Q18.

We rate First Resources a BUY with discounted cash flow (DCF)-based Target Price of S$2.18 (WACC: 11.8%; TG: 3%).
Our Target Price implies FY18F PE of 15.8x, slightly higher than its peers, attributed to its stronger organic growth prospects due to a younger plantation profile.

William Simadiputra DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-02-28

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.180 Same 2.180