Target Price: SGD2.70
Plantation Sector Top Pick
We upgrade the plantation sector to OVERWEIGHT, with First Resources (FR) still being our Top Sector Pick given its compelling valuation, favourable age profile and strong management. Following a sector-wide CPO price upgrade, we raise our earnings projections for FY14 by 2% and introduce our FY15 earnings forecast at USD272m. We lift our FV to SGD2.70 (from SGD2.65), based on a 16x CY14 P/E.
¨ Upgrading sector-wide CPO prices. We upgrade the plantation sector to OVERWEIGHT (from Neutral) as earnings outlook brightens after two years of contraction. We raise our CPO price assumptions for CY14 and CY15 to MYR2,700 and MYR2,900 per tonne respectively (from MYR2,600), but maintain our price assumption for CY13 at MYR2,400/tonne.
¨ Four main factors driving the upgrade are: i) stronger global economy, which means food demand will continue to grow, ii) Indonesia’s production growth will be lacklustre due to the double impact of dry weather in 2012 and 2013, iii) the implementation of mandatory biodiesel in the world’s two biggest palm oil producing countries, and iv) production cost to remain flattish to lower due to significantly cheaper fertilisers following the potash cartel breakup in mid-2013.
¨ Forecast revision. Following the revision in our palm oil price assumptions, we raise our FY14 net profit forecast by 2% to USD216m. We trim our FY14 production growth assumption to 3% (from 6%) to factor in the adverse weather conditions in Indonesia in 2012 and 2013. We also introduce our FY15 forecast at USD272m.
¨ Still our Top Sector Pick. FR remains our Top Sector Pick given its compelling valuation, favourable age profile and strong management. The stock trades at just 12.6x FY14 and 10.0x FY15 earnings.
Publish date: 23/12/13