Defying the odds in 1H
First Resources defied the odds of weaker CPO selling prices, lower FFB yields and rising labour costs to post a 2% rise in its 1H13 net profit. This is a remarkable achievement vis-à-vis other upstream players, thanks mainly to the realisation of forward sales.
1H13 net profit was broadly in line with our expectation as it accounted for 51% of our and consensus FY13 forecasts. But we trim our 2013 EPS by 2% to account for a weaker FFB yield guidance and better 1H13 CPO ASPs. We maintain our Outperform call and target price, still based on 12.3x CY14 P/E or 1 s.d. above its 4-year mean. Re-rating catalysts are expected from higher production and downstream contributions.
2Q results highlights
2Q net profit fell 26% yoy due to lower CPO sales volumes and ASPs from the refinery and processing segment. The decrease in 2Q sales volumes was due to the build-up of 30,000 tonnes of inventory qoq caused by transportation delays. It posted a sharper 41% qoq decline in 2Q net profit due to weaker CPO sales volumes, ASPs achieved and refining profits. But 1H13 net profit rose 2% due to higher ASPs achieved for CPO (driven by forward sales realisation), a 10% rise in CPO sales volumes (driven by the drawdown of inventory) and a lower effective tax.
Lower output guidance
We are neutral in the wake of the group’s results teleconference where it downgraded its guidance for nucleus FFB output growth to 0-5% from 5-10% for 2013, but indicated that it still has some forward sales to be fulfilled for the rest of the year at favourable prices. That said, the group did not divulge the quantum and selling price of its forward sales. Overall, we expect 2H net profit to be marginally weaker hoh as the lower ASPs achieved may only be partially offset by higher seasonal production and lower fertiliser costs.
We nudge down our FY13 earnings by 2% to account for lower FFB production. The stock remains one of our top picks in the plantation sector, thanks to its attractive valuations, cost-efficient estates and attractive estates profile.
Publish date: 14/08/13