Monday, September 9, 2013

First Resources : Musing on output and rupiah (CIMB)

First Resources
Current S$1.91
Target S$2.22
Musing on output and rupiah

 First Resources posted a FFB yield of 1.8 tonnes/ha in July, which is the best monthly yield achievement for 2013. We are positive on the pick-up in yield, which is in within expectations. The group will also benefit from the weaker rupiah through lower labour costs.

We estimate every 5% depreciation in the rupiah could boost FY13 net profit by 1.5%. We maintain our EPS and target price of S$2.22, still based on a CY14 P/E of 12.3x (1 s.d. above its mean). We continue to like First Resources for its young and well-managed estates as well as its attractive P/E valuation. It also stands to benefit if the rupiah stays weak relative to the US$. Hence, our Outperform call is intact.

What Happened
First Resources posted a 28% mom jump in FFB output in July 13, thanks to better FFB yields – in line with seasonal trends. This brings its 7M13 FFB production to 1.05m tonnes, a 1.1% improvement from last year. However, July and 7M13 FFB yields are 22% lower yoy, due to biological tree stress and dilution from newly acquired and mature estates.

What We Think
The July production statistics are broadly in line with our forecast of 6% FFB output growth for FY13 and the group's guidance of 0-5% growth from its nucleus estates. Even if output is slightly disappointing, we believe that the Indonesian rupiah's current weakness vs. the US$ will partially offset this. This is due to the fact that the group's revenue is mainly denominated in US$, while a substantial portion of its cost is denominated in rupiah. We estimate that the sensitivity of our FY13 earnings to every 5% change in the rupiah is 1.5%. This is based on the assumption that 42% of the group's cost of production for CPO (mainly labour), which is denominated in rupiah, will be lower in US$ terms. In terms of debt, 96% of the group's borrowings are effectively US$ debt, as the group has swapped its medium-term notes (MTNs) in ringgit to US$.

What You Should Do
We are advising investors to add to their positions in First Resources as we expect 2H earnings to benefit from higher production, while the weaker rupiah may temper the yoy rise in labour costs in US$ terms. The group is also relatively sheltered from a rising interest-rate scenario as we estimate that 96% of its debt are on fixed rate.

Highest YTD monthly FFB production in July
First Resources posted a 28% mom jump in FFB production from its nucleus estates in July 13. This is driven mainly by higher FFB yields, which went up in line with seasonal trends. FFB yields rose 29% mom to a 7-month high of 1.8 tonnes per ha. However, FFB production nudged up by only 3% yoy, driven mainly by larger new mature areas as FFB yields were lower.

Key reasons behind the yield decline
FFB yield fell 22% yoy in July and 7M13. The decline was due mainly to biological tree stress, following a bumper production in the past two years. On top of this, FFB yields were also diluted by a higher percentage of young trees and lower-yielding plantation estates that were acquired. Approximately, 10,000ha of new nucleus estates and 4,000ha of plasma estates came into maturity in 1H13. On top of this, the group added 12,000ha of new mature estates through acquisitions. The new estates fetched lower yields compared to the group's existing estates. In total, the newly mature and recently acquired estates accounted for 21% of the group's total mature estates.

OER rate affected by higher third-party purchases
The average oil extraction rate (OER) achieved by its mills continued to hold at 22.7% on a mom basis but was lower compared to last year's achievement of 23%. We believe that the lower OER was due to the fact that the group bought more third-party fresh fruits bunches (11% in July 13 vs. 3.7% in July 12) for processing, following the completion of additional mills.

Production growth broadly in line with expectation
We expect its FFB yield to remain flat or weaker in August as workers return home to celebrate the Ramadan festival. FFB yields should pick up from September onwards and stay firm till the end of the year. Historically, FFB yields achieved in 2H are stronger, and September and October are the peak yielding months for First Resources. We did a simulation which forecast that the group will record a monthly yield of 1.6-1.9 tonnes/ha for the rest of the year. Based on this, we arrive at a full year FFB output from its nucleus estates of around 2m tonnes, representing a 5.5% growth rate. This is in line with our forecast of 6% growth and its guidance of 0-5% growth for the full year.

Triple boost for production growth next year
Overall, it has been a disappointing year in terms of production for the group due to the lower FFB yield. The good news is that we expect next year's production growth to be stronger as the group will benefit from: 1) recovering yields from its estates as the effect of biological tree stress wears off, 2) FFB yield improvements in its newly acquired estates from the ongoing rehabilitation programme, and 3) additional newly mature estates from previous year's plantings. We expect the group to post a 20% jump in FFB production in 2014, driven by the abovementioned factors.

Cost relief from weaker rupiah
The Indonesian rupiah fell to its lowest level in four years due to concerns over the country's widening current account deficit. Over the past month, the rupiah has weakened by 10%. This could benefit the group on the cost side as all its estates are located in Indonesia, while the group reports its financial statements in US$.

We believe that the group could enjoy some savings in US$ terms for labour costs as estate workers' salaries are denominated in rupiah. The group has guided that the wage component makes up around 42% of its average cost of production for CPO of US$260-280 per tonne. Based on this, we estimate that every 5% depreciation in the rupiah will lower its cost of production by around US$5.6/tonne or US$3m (equivalent to 1.5% improvement in FY13 net profit forecasts), assuming a full-year impact. However, the sharp drop in rupiah took place in August/September. Taking an impact of four months and assuming a 10% depreciation in the rupiah, we estimate that the potential earnings enhancement will amount to only 1% for the current year.

Minimal borrowings exposure to rupiah
The group's net borrowings increased from US$133.4m as at 31 Dec 2012 to US$242.5m as at 30 Jun 2013, as the group spent US$85m to expand its estates and processing facilities as well as US$64.9m for the acquisition of new estates. The net gearing of the group remains healthy at 0.2x.

Of the group's total borrowings of US$538m on the balance sheet, 96% are denominated in ringgit and 4% in rupiah. However, we gathered that the group has swapped its ringgit debt of RM1.6bn to US$ to better match its revenue profile. As such, 96% of the group's debt are effectively in US$ and as such from this perspective, the group will not benefit much from the rupiah's weakness. The bulk of the group's borrowings are on fixed rate and this will help shelter the group's borrowing costs in a rising interest-rate environment.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 09/09/13

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