First Resources -
Our pick of the crops
First Resources is our top pick among the regional planters due to its superior operating efficiency over peers, strong FFB output growth prospects and attractive P/E valuations compared to peers. It is also expected to gain additional income from its refinery expansion in 2014.
We project that the group’s free cashflow will improve in FY14 due to the higher operating cashflow and lower capex spend. This could lead to better dividend payouts. Under our new rating structure, our rating changes from Outperform to Add. We maintain our S$2.75 target price, based on 12.3x CY14 P/E (1 s.d. above its 4-year mean). The re-rating catalysts are its strong FFB production and higher dividends.
Efficient and young estates
First Resources' young estate profile (average age of eight years) is one of the group’s key strengths. The young estates will boost future output growth and counter the cost increases resulting from the rising minimum wage in Indonesia. We forecast 20% FFB output growth from its nucleus estates in FY14, led by the new mature areas, improving yields from the recently-acquired estates that the group is rehabilitating and existing estates, which are projected to recover from the low production cycle or tree stress.
First Resources’ superior operating metrics enable the group to produce CPO at a lower cost per tonne (US$260-280) and generate higher profit per mature ha than its peers. We expect higher output and better CPO prices to drive its FY14 earnings. We are more bullish on the CPO price prospects in 2014 due to the lower palm oil stockpiles and rising biodiesel demand from Indonesia.
Better downstream earnings
As part of its downstream expansion, the group added a new 600k-tonne refinery in 2H13. This will raise its refining capacity to 850k tonnes, allowing the group to refine all of its CPO in-house and extract better profit margins for its palm products. Its biodiesel plant in Indonesia stands to benefit from the higher demand in the country following the government’s moves to raise its biodiesel mandates.
Lighter capex in 2014
We project that the group's capex will taper in FY14 once its refinery expansion is completed. As such, there could be room for higher dividend payouts in 2014. Our current forecast assumes a 30% dividend payout ratio.