Singapore: First Resources (FR SP) BUY
Price/Tgt: S$1.78/2.40 Mkt Cap: US$2.0b Avg Val: US$3.0m Hi/Lo: S$2.19/1.47
3Q15: Strong Production To Cushion Price Weakness
What's new
· First Resources (FR) announced Sep 15 production data. As expected, FFB production for Sep 15 fell 3% mom after peaking in Aug 15. But production was still up 18.8% yoy, driven by larger mature areas, as young areas in Kalimantan moved into prime age, as well as on high production from Sumatra in 1H15.
· For 3Q15, CPO production surged 32.6% qoq and 8.1% yoy on the back of higher nucleus production. This would drive its 3Q15 earnings.
Figure 1: Monthly Production Summary
| (tonne) | Sep 15 | mom % chg | yoy % chg | 9M15 | yoy % chg | Comments |
| Total Process | 333,302 | (2.9) | 13.0 | 2,305,393 | 11.4 | |
| FFB Harvested | 305,185 | (2.6) | 15.5 | 2,061,920 | 14.4 | |
| Nucleus | 278,787 | (3.0) | 18.8 | 1,861,975 | 15.1 | The mom decline within expectation due to a higher base in August when harvesting picked up after workers returned from the Hari Raya break. |
| Plasma | 26,398 | 1.3 | (10.5) | 199,945 | 8.4 | |
| FFB Purchased | 28,117 | (5.4) | (9.0) | 243,473 | (8.9) | |
| CPO | 75,804 | (2.2) | 12.9 | 514,499 | 11.6 | |
| Palm Kernel | 17,027 | (3.9) | 12.1 | 119,158 | 11.3 | |
| Blended FFB Yield (ton/ha) | 2.1 | - | 5.0 | 13.9 | 1.5 | Boost from young prime areas in Kalimantan. |
| CPO Yield (ton/ha) | 0.5 | - | - | 3.2 | ||
| OER (%) | 23.1 | 0.4 | - | 22.8 | 0.9 | Extraction rate improved with less third-party FFB processed. |
| PK Extraction Rate (%) | 5.2 | (1.9) | - | 5.3 | - |
Source: FR, UOB Kay Hian
Comments
· On track to meet expectations. 9M15 nucleus production rose 15.1%, ahead of our expectation of 12.8% yoy for 2015. We are keeping our forecast because: a) of the higher base in 4Q14, and b) current dryness and haze could delay the ripening process and result in smaller bunch sizes.
· Based on the reported production data, FR's 3Q15 net profit would likely be flat qoq but lower yoy. The higher qoq production is expected to be offset by lower average selling price (ASP). Also, 2Q15 sales were boosted by inventory drawdown. The positive indicator to look out for in 3Q15 is its downstream business, which should perform better qoq on higher refining margins and volume. Yoy, 3Q15 net profit would very much be affected by the much lower estimated ASP of US$500-530/tonne vs 3Q14's US$660/tonne. Refining EBITDA margin would also not be as high as 3Q14's US$49.4/tonne due to the absence of biodiesel sales volume as well as higher competition, but it should be better than the US$6.5/tonne in 2Q15.
Recommendation
· Maintain BUY and target price at S$2.40, based on 15x 2016F PE. We like FR as it is a beneficiary of Indonesia's new export levy and biodiesel policies. It also has one of the lowest production costs and a good track record of delivering better-than-industry FFB yield and OER.
Figure 2: FR's Monthly Production
Source: FR
Regards,
Singapore Research Team
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This transmission has been issued by a member of the UOB Kay Hian Group for the information of the addressee only and should not be reproduced and/or distributed to any other person. Each page attached hereto must be read in conjunction with any disclaimer which forms part of it. Unless otherwise stated, this transmission is neither an offer nor the solicitation of an offer to sell or purchase any investment. Its contents are based on information obtained from sources believed to be reliable but UOB Kay Hian Group makes no representation and accepts no responsibility or liability as to its completeness or accuracy.
This transmission has been issued by a member of the UOB Kay Hian Group for the information of the addressee only and should not be reproduced and/or distributed to any other person. Each page attached hereto must be read in conjunction with any disclaimer which forms part of it. Unless otherwise stated, this transmission is neither an offer nor the solicitation of an offer to sell or purchase any investment. Its comments are based on information obtained from sources believed to be reliable but UOB Kay Hian Group makes no representations and accepts no responsibility or liability as to its completeness or accuracy.
