Thursday, July 18, 2013

First Resources ; FFB Production To Pick Up In 2H13 (UOBKH)

First Resources
Share Price S$1.69
Target Price S$2.60
FFB Production To Pick Up In 2H13

FR reported lower-than-expected FFB production growth in 1H13. However, based on historical trends, a strong 2H recovery could still result in the company meeting its target. Despite the weak FFB production in 1H13, FR reported CPO production growth of 7% yoy on higher third-party crop intake. Maintain BUY. Target price: S$2.60.

What’s New
• Investors are concerned that the weak 1H13 production could lead to First Resources (FR) missing management’s FFB production growth target of 10%. Alternatively, this target could be missed due to the recent hot weather and haze in Central Sumatra. As shown in historical trends, a strong 2H production recovery is still possible. However, the hot weather in Central Sumatra still remains a concern.


• FR has announced its monthly production statistic. Its Jun 13 nucleus FFB production grew 9.4% mom but only up 0.3% yoy to 158,672 tonne. CPO production grew 8.9% mom but was stronger yoy (+5.4% yoy) to 44,776 tonnes. Due to higher third-party fruit intake (22,338 tonnes vs Jun 12’s 3,222 tonnes) resulted in FR maximising its mill utilisation rates with decent contributions (milling margins can average 15-25%).

• In 1H13, FR recorded nucleus FFB production of 842,989 tonnes (+0.6% yoy) and CPO production of 241,443 tonnes (7.1% yoy). In 1H13, 111,756 tonnes of FFB were purchased (vs 16,104 tonnes in 1H12).

Stock Impact
• Since production in 1H13 was slower, 2H13 pick-up is crucial. For 1H13, nucleus FFB production was up by 0.6% yoy vs our full-year expectation of 12-13% yoy (vs management guidance of 10%). Based on historical trend, a strong recovery in 2H is possible, and this would result in FR being able to achieve our expectations. Back in 2010, 1H10 FFB production only accounted for about 39% of full-year production (1H13: 39%) and strong production in 2H10 contributed about 61% of 2010’s production. We have spoken with management, and they are keeping their guidance at this point in time. More updates will be available during the 2Q13 results briefing. Results are expected to be out on 13 Aug 13.

• Plasma areas taking a rest. In Jun 13, plasma FFB production dropped by 25.2% yoy (+6.0% mom) to 14,473 tonnes, and dropped by 9.9% yoy for 1H13. This is because plasma areas have yet to recover from their abnormally high productivity in 2H12. This is not alarming as we have also observed similar patterns in some of the older trees areas in Malaysia.

• Production changes have small impact on EPS. Based on our sensitivity analysis, if FR’s FFB nucleus productions were to grow by 10% yoy in 2013 (vs expectation of 12.6%), FR’s EPS would be 3% or 0.3 US cents lower than our expectation of 10.7 US cents.

Earnings Revision/Risk
• No change in our earnings forecast. We forecast net profits of US$175m, US$219m and US$236m for 2013, 2014 and 2015 respectively.

Valuation/Recommendation
• Maintain BUY with target price of S$2.60, based on 15x 2014F PE. We like FR for its hands-on management team, young age profile and efficiency.

Share Price Catalyst
• Value-enhancing landbank acquisitions - we are seeing more planted areas being put up for sale due to the tougher operating environment arising from a labour shortage and rising labour cost.


Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian research
Publish date: 16/07/13

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