Share Price S$1.88
Target Price S$2.40
Top Of The League
We are confident that First Resources is on track to deliver a good set of numbers for 2H13. Besides the better-then-peers ASP, FFB yield has showed good recovery to deliver better upstream profit in 2H13. Downstream operations are getting competitive as new capacities come on-stream but the impact on FR is mitigated by a timely switch to biodiesel production as EU demand returns. Maintain BUY. Target price: S$2.40.
• Key takeaways from our recent meeting with First Resources (FR): – Production recovery started in Aug 13 but FFB yield from nucleus is still lagging behind FFB yield reported in 2012. Management is keeping production growth guidance of 0-5% (vs our expectation of 3% yoy growth for 2013).
– Timely switch to biodiesel as refining margin gets thinner. Refining margin in Indonesia shrunk significantly as new capacity came on-stream. At times, refining margin was negative as competition drove feedstock (CPO) price higher.
– Demand from China remains strong as domestic inventory declines, but Indian buyers remain hand-to-mouth purchase given uncertainty from rupee depreciation.
• 2H13 to deliver good performance. Based on the above findings, FR is likely to deliver a better set of 2H13 results on a) higher production hoh and slight improvement yoy from acquired land, b) good ASP from forward contracts, and c) stable refining margins with higher sales volume.
• Strengthening of the US dollar against the rupiah benefits FR. While the majority of FR’s revenue is denominated in the US dollar as it focuses on the export market, a substantial portion of its costs are denominated in the rupiah due to its operation in Indonesia. An appreciation of the US dollar would result in translation gains for FR due to lower operating cost. According to disclosure in FR’s annual report, every 10% weakening in the rupiah against the US dollar would increase its pre-tax profit by 1.4-4.5%.
• Production recovery started in Aug 13 but FFB yield from nucleus is still lagging behind FFB yield reported in 2012. In Aug 13, FR reported a marginal growth of 1.0% mom in FFB production likely due to strong yield recovery from water stress in 1H13. The strong yoy growth of 15.5% for Aug 13 was largely driven by acquired estate of 8,634 ha (5.3% of total planted area). Management commented that the recovery in Aug 13 lagged 2012’s, ie FFB yield for Aug 13 of 1.9tonne/ha was lower than 2.1tonne/ha in previous year.
• On track to meet guidance... FR’s FFB production of 3.2% ytd is on track to meet management guidance of 0-5%. FR has been delivering strong FFB production growth of about 12-19% yoy in the past two years. Slower growth rate is expected this year as trees enter biological stress after two strong growth years and also affected by the drier weather in 1H13.
• ... with potential to exceed our expectation of 3%. FFB production is likely to peak in Sep/Oct 13 with the recovery in FFB yield and pick-up in harvesting activities after the Hari Raya break. Thus, FR's FFB production could be higher than our expectation. Based on our sensitivity analysis, for every 1% higher-than-expected FFB production, FR's net profit would be 1.4% higher than our forecast.
• Timely switch to biodiesel as refining margin gets thinner. Refining margin in Indonesia shrunk significantly due to rising competition from new capacity :
– Higher feedstock prices. CPO prices in Indonesia are now trading higher than Malaysia’s due to rising demand in Indonesia. Based on historical trend, Indonesia’s CPO price traded below Malaysia’s due to scarcity of downstream operation and logistics.
– Lower refining product prices. As more refined products become available for exports from Indonesia, competition has driven down the selling prices for refined products.
• No change in earnings forecast. We are now expecting EPS of 11.9 US cents, 13.7 US cents and 15.0 US cents for 2013, 2014 and 2015.
• Maintain BUY with a lower target price of S$2.40 (previously TP: 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
• CPO prices breaking out from current trading range.
• Value-enhancing landbank acquisition as we are seeing more planted areas up for sale due to the tougher operating environment arising from a labour shortage and rising labour cost.