Tuesday, November 19, 2013

First Resources 3Q13: Timely Switch To Biodiesel Production (UOBKH)

First Resources
Share Price S$2.06
Target Price S$2.40
3Q13: Timely Switch To Biodiesel Production

Results above expectation on lower-than-expected effective tax rate for 3Q13. Strong FFB production growth in 3Q13 helped to offset the decline in CPO ASP arising from fewer forward selling contracts delivered. However, CPO ASP was still better than its peers. FR’s downstream operation margin would continue to benefit from its timely switch to biodiesel production as refining margins become thinner. Maintain BUY. Target price: S$2.40.

• FR reported a net profit of US$51.4m (+36.4% qoq, -20.0% yoy) for 3Q13 and US$152.7m (-6.9% yoy) for 9M13. Its 9M13 results account about 85% of our full-year forecast. Results were above our expectation mainly on lower-thanexpected effective tax rate coming from tax adjustment by subsidiaries.

• The sharp qoq increase in 3Q13 net profit was mainly driven by :
a) Increase in FFB production. Nucleus FFB production was up by 37.3% qoq (+8.2% yoy). Besides the seasonal factor, this also indicates strong production recovery from its Sumatra estates in 3Q13 as well as contribution from its newly-acquired plantation. This helped to offset the weaker CPO ASP of US$844/tonne (- 7.4% qoq, -3.0% yoy) reported in the quarter.

b) Better EBITDA margin for refinery and processing segment on its timely switch to biodiesel as refining margin becomes thinner. EBITDA margin was up 15.5% qoq to US$63.9/tonne but down 76.4% yoy mainly due to the abnormal EBITDA margin of US$271/tonne reported in 3Q12 that is unlikely to be repeated.

• CPO sales volume in 3Q13 was up 30.4% qoq (+25.7% yoy) mainly due to higher production during the quarter. However, it is still lower than CPO production volume as there was inventory build-up of approximately 27,000 tonnes during the quarter.

• In 9M13, CPO production increased by 9.2% yoy, much higher than FFB production growth of 3.7% mainly due to increase in third-party fruit intake to maximise the utilisation rate of its mills.

• FFB yield was down by 21% yoy during 9M13, mainly due to the young areas and Sumatra estates experiencing biological stress, while oil extraction rate was down 1.7% yoy mainly due to higher third-party fruit intake during the year.

Stock Impact
• FFB production growth on track to meet expectation. For 9M13, nucleus FFB production was up by 3.7% yoy to 1.46m tonnes vs full-year expectation of 3% yoy (vs management guidance of 0-5%). The yoy increase was mainly boosted by the recovery in FFB production in Sumatra and continued good growth from its Kalimantan young areas. However, we are maintaining our forecast as we are expecting weaker FFB production in 4Q13 due to seasonality.

• Inventory build-up to drawdown in 4Q13. The inventory build-up of approximately 27,000 tonnes during the quarter was mainly due to delivery timing, and will be delivered in 4Q13. This would help to boost sales volume in 4Q13 as we are expecting lower production in 4Q13 that would affect the sales volume for the quarter as well.

• CPO ASP still better than peers. Although FR’s CPO ASP has decreased by 7.4% qoq (-3.0% yoy) to US$844/tonne as there were fewer forward selling contracats delivered in 3Q13, its ASP is still better than its peers, ranging from US$646-806/tonne. Its ASP in 4Q13 is expected to continue being supported by the recent recovery in CPO price and some forward selling contracts that will be delivered in 4Q13.

• Timely switch to biodiesel as refining margin gets thinner. As the refining margin in Indonesia has shrunk significantly due to rising competition from new capacity, FR has switched to biodiesel production in 2H13 to capture the better margin from biodiesel production. We expect FR to continue benefiting from biodiesel production in 4Q13.

• New planting on track to meet guidance. FR has planted about 10,839ha in 9M13 (9M12: 6,336ha). It is on track to meet its targeted 12,000-15,000ha of new planting in 2013.

Earnings Revision/Risk
• 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 respectively.

• Maintain BUY with a target price of S$2.40, 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 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.

Source/Extract/Excerpts/来源/转贴/摘录: UOBKH-Research,
Publish date: 14/11/13

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