Tuesday, October 1, 2013

First Resources : Adding value from biodiesel (DBSV)

First Resources
BUY S$1.875
STI: 3,211.75
Price Target: 12-month S$2.19 (Prev S$2.15)
Adding value from biodiesel

• FY13F-15F earnings lowered by -1% to +6% on cuts in CPO ASP, weaker Rupiah
• FR to continue producing biodiesel for domestic sales, given higher mandatory blends in Indonesia
• BUY for 17% upside. We believe the market has yet to price in biodiesel margin contribution
• Risk lies in opaque forward contracts

Rupiah depreciation confers slight benefit. We tweaked FR’s FY13F/14F/15F net profits by -1%/+6%/+6% ; as we impute lower CPO ASP, weaker Rupiah exchange rate and higher minimum wages next year. Lower spot prices (in USD terms) may drag overall ASP, despite higher prices from remaining forward contracts. This should partly offset benefits from lower Rupiah costs. Nevertheless, there is upside in earnings, as we now impute domestic biodiesel sales from FY14F (vs. zero previously).

Biodiesel boost. We forecast total biodiesel sales of c.75k MT p.a. from FY14F; as we assume FR to continue selling to Pertamina, given the recent hike in mandatory blend. With biodiesel margins notably higher than fractionation margin; our sensitivity analysis shows a S$0.10/share valuation boost from imputing the additional biodiesel production.

Still undervalued. We reiterate our BUY rating for 17% upside (excluding 5% dividend yield). Between FY12 and FY15F, we expect FR to book earnings CAGR of 9%. The group continues to derive most of its profitability from its upstream operations, which we expect to expand by 13-14k ha p.a. through CY15F. While maintaining strong refining margins may be a challenge (given rising capacities industrywide), this should be mitigated by higher biodiesel margin. We see no significant margin pressure from an anticipated jump in minimum wage next year, given the group’s lowcost structure.

Risks to our call. FR has consistently delivered strong margins despite the drop in CPO prices, thanks to its hedging strategy. Yet, as forward sales contract prices and volumes are not disclosed, there could be risks in earnings expectations, which may cause volatility in the counter’s share price.

Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 26/09/13

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