First Resources (FR SP) - UOB Kay Hian 2018-02-28: Growth From FFB Production Will Be Offset By Weaker CPO ASP

First Resources (FR SP) - UOB Kay Hian 2018-02-28: Growth From FFB Production Will Be Offset By Weaker CPO ASP FIRST RESOURCES LIMITED EB5.SI

First Resources (FR SP) - Growth From FFB Production Will Be Offset By Weaker CPO ASP

  • We made no changes to our 2018-19 net profit forecasts post briefing, while introducing 2020 net profit forecast of US$176m (+12% y-o-y). 
  • We expect FFB production growth of 18% y-o-y for 2018, slightly higher than management’s guidance of 10-15% y-o-y. We expect earnings to fall marginally in 2018 on a 6% y-o-y decline in CPO ASP assumption against FFB production growth of 18% y-o-y. 
  • Maintain HOLD. Target price: S$1.95. Entry price: S$1.75.



WHAT’S NEW


Maintain earnings forecast. 

  • Post briefing, we maintain our 2018-19 net profit forecasts of US$137m and US$160m respectively. We introduce 2020 net profit forecast of US$179m (+12% y-o-y) on the back FFB production growth of 7% y-o-y and CPO ASP assumption of RM2,500/tonne (2019F: RM2,500/tonne). The 1.5% decline in 2018 net profit forecasts is due to weaker CPO ASP (we are expecting a 6% y-o-y decline for our 2018 \ASP assumption). 
  • Our 2018 net profit forecasts is lower than consensus due to weaker CPO price assumption of RM2,400/tonne (vs market expectations of RM2,500- RM2,600/tonne).

Guides 10-15% FFB production growth for 2018. 

  • Management is guiding for FFB production growth of 10-15% for 2018 on the back of FFB yield recovery and an additional 16,000 ha of newly mature areas (10.8% of 2017 nucleus mature areas). 
  • We are expecting FFB production growth of 18% y-o-y for 2018, slightly higher than management’s guidance.

OER to recover in 2018. 

  • OER was lower in 2017 (22.2% in 2017 vs 22.5% in 2016) due partly to the impact from the lagged impact from 2015 El Nino, which was similar to industry trend. Based on the performance in 2M18, management expects OER to recover back to 2016’s level at the very least, which will translate into 1.0-1.2% growth just based on better OER. 
  • We are expecting OER of 22.8% for 2018.

CPO production target of 1m tonnes by 2020 is achievable. 

  • Management expects its CPO production to hit 1m tonnes by 2020 from its 2017 production of 702,368 tonnes (i.e. 42.4% over the next three years), on the back of better FFB yield from young prime areas (26% of its total planted areas). 
  • Under normal weather conditions, we think 1m tonnes of CPO production target is achievable based on about 220,000 ha of mature areas (nucleus and plasma) and oil yield of about 4.5-4.6 CPO tonnes/ha (vs 2017 of 3.9 tonnes/ha) supported by its young age profile (average age of 10 years and 57% of trees aged 4-17 years).


STOCK IMPACT


Replanting of old areas to start in 2018. 

  • In 2017, only about 1,300 ha had been planted in Kalimantan. 
  • For 2018, management is guiding for 3,000-4,000 ha of new planting for 2018, which include the 800 ha due for replanting in Riau. This will be the first replanting of older trees for FR. FR has about 26% of planted areas aged above 18 years.

Expect cash cost of production to stay within US$200-220 per tonne. 

  • Higher labour (+10% y-o-y) and fertiliser cost (+8-10%) will be offset by improvement in production. Thus, unit cash cost should remain stable within the range of US$200-$220/tonne for 2018.
  • The cost guidance is in line with its peers.

No change to dividend payout ratio of 30%. 

  • The special dividend is a one-off, in conjunction of its 10-year listing anniversary and 25 years since incorporation. Dividend policy will be kept at 30% payout, and a revision in dividend policy, if any, will only be considered when FR achieves net cash position. 
  • Based on our operating cashflow projection and smaller capex requirement, its net gearing ratio will decrease to 0.02x by end-20 (from 0.21x as of Dec 17), and FR is likely to be in net cash position by end-21.
  • As the special dividend is paid out from the dividends from its Indonesia-based subsidiary, there would be a one-off withholding tax of approximately US$5m-$6m to be charged out in 2Q18.

Conservative M&A strategy. 

  • FR has been receiving various M&A proposals, but management has stated that any potential M&As will be focused on plantation upstream in Indonesia only. This can be for any type of crop, but management also reckons that it is no longer easy to start a greenfield operation for any type of agricultural crop due to more stringent sustainability requirements and the lack of forest land to be converted.
  • Thus, any M&A opportunities are likely to come in the form of acquiring existing companies with upstream plantation operations.


EARNINGS REVISION/RISK

  • Maintain our 2018-19 net profit forecasts of US$137m and US$160m respectively. 
  • We introduce 2020 net profit forecast of US$179m on the back of FFB production growth of 7% y-o-y and CPO ASP assumption of RM2,500/tonne (2019F: RM2,500/tonne).


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


Stronger-than-expected FFB production. 

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




Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-28
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.950 Same 1.950



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