- Maintain BUY with a revised TP of SGD2.43 on 15x FY15E P/E after cutting our FY14E-16E EPS by 15%/9%/7%.
- 2Q results were below our and market expectations on low nucleus FFB output, higher tax expenses and higher costs.
- We expect better 2H earnings on seasonally higher FFB output, lower costs, and stronger biodiesel contribution.
First Resources’ (FR) 2Q14 core net profit of USD26m (-31% YoY, -42% QoQ) met 13% of our FY14E forecasts and 12% of consensus’. The lower-than-expected 2Q results were mainly due to: (i) lower CPO ASP achieved of USD702/t (-23% YoY, -5% QoQ) in the absence of forward sales locked-in in early 2012 (and delivered in 2013); (ii) relatively weak nucleus FFB output (+6% YoY, +7% QoQ); and (iii) higher effective tax rates of 35% (+16-ppts YoY, +15-ppts QoQ).
Meanwhile, the biodiesel division benefited from low feedstock costs as downstream EBITDA rose to USD16m (+638% YoY, +435% QoQ) or USD157/t on strong margins. But we gather the refinery margin remains thin due to overcapacity in Indonesia.
FR has added 8,318 ha of new nucleus area in 1H14 (+6% YTD) which will ensure its sustainable long term growth.
What’s Our View
We cut our FY14E-16E EPS largely by (i) lowering our nucleus FFB output assumption by 6%%/2%/0%, and (ii) increasing our effective tax rates to 25% (previously 23%). Still, we believe FR will deliver stronger 2H14 earnings. Its integrated model, namely its biodiesel division, will benefit from present low CPO prices.
We like FR for its proven management and its long-term value proposition, backed by its plantable reserves of 100k ha, young tree of eight years (average) which will sustain a projected 11.8% FFB output CAGR (2013-2016), and low cost of production.
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