First Resources -
Price Target: S$2.60
Favorable risk-reward, stay OW
The recent share price correction has provided potential re-entry point for First Resources as risk-reward improves. Downside risk to earnings is also among the lowest versus its peers. We reiterate OW.
■ Strong production recovery to drive outperformance:
We believe First Resources is likely to remain one of the outperformers among regional plantation peers this year. The company’s just-released Dec-2013 production numbers saw a strong pick-up in CPO production with 4Q13 up 19% Y/Y, ending FY13 with 12% Y/Y growth. With c.11,000ha (+9%) of estates expected to mature in 2014, and combined with recovery from tree stress, we expect 15-20% production growth this year for First Resources.
■ Better margin vs. peers to be sustained:
First Resources has been able to achieve higher-than-peers EBITDA margin from a combination of higher-than- peers ASPs and being the lowest-cost producer and we believe this is sustainable. We believe the 10-15% CPO price recovery in 4Q13 gave the company the opportunity to hedge some of its FY14 production at higher ASPs, just as earlier hedges in FY12 are starting to come off. First Resources is expected to remain the lowest cost producer regionally at US$260-280/MT helped by stronger production in FY14.
■ Downstream expansion provides new growth drivers for FY14:
First Resources has successfully completed the construction and commissioning of its new downstream expansion, taking capacity from 250,000 MT/year to 850,000 MT/year. FY14 will be the first year that we will see meaningful ramp-up in the new capacity and earnings contribution coming from it. We forecast 18% Y/Y growth in downstream earnings from the ramp-up of the new capacity on higher sales volumes.
■ Reiterate OW, raise Dec-14 PT to S$2.60:
We expect c.27% earnings recovery in FY14 on higher CPO price and production and new downstream capacities.We raise our group earnings estimates by 2% for FY14E/FY15E on higher downstream volume assumption and, so, raise our target price from S$2.50 to S$2.60. At 10x FY14E P/E, valuation looks undemanding vs the Singapore sector average of 12x.
Publish date: 21/01/14