First Resources

Kim Eng on 28 Feb 2012

First Resources (FR SP) – Growth engine intact
Previous day closing price: $1.845
Recommendation – Buy (maintained)
Target price – $1.95 (raised)

Record profits. FR’s 2011 net profit of US$196m (+37% YoY) was the highest ever. Setting aside gains on the fair value of biological assets, its core net profit of US$168m (+55% YoY) was within our expectations, but slightly above Street estimates. We raise 2012-14 net profit forecasts by 13-16% pa to reflect higher CPO ASP assumptions and new downstream growth. Reiterate Buy with a higher target price of S$1.95 (+9%) on an unchanged 14x 2013 PER.

Boosted by upstream growth. 2011’s record performance was boosted by (i) higher FFB output (+19% YoY to 1.73m tonnes), (ii) higher CPO ASP ex-mill at US$835/t (+15% YoY), and (iii) a strong turnaround in its downstream business. FR’s all-in cost of production remains one of the lowest among the planters, at US$294/t (+11%).

Upstream expansion ongoing. FR planted 11,421ha of oil palms in 2011 (2007-11 average: +10,500ha pa), short of its initial target of 15,000ha but still high compared to peers. This allows FR to stay “young”, with an average tree age profile of about eight years (as of December 2011). We forecast a three-year FFB CAGR of 9% over 2011-14 (2012: +9%). For 2012, we estimate FR will plant 12,000ha of oil palm trees, although management has set a higher target of 15,000-20,000ha.

Downstream turnaround. FR’s fractionation plant expansion in 2011 was timely, as its downstream division posted a maiden EBITDA of US$27m (2010: loss of US$2m), contributing 9% to group EBITDA. FR plans to take further advantage of the recent change in Indonesia’s export duty structure (which favours downstream players) to increase its refining capacity to 850,000tpa (+240%) by 1Q13.

Still a Buy. We raise our 2012-14 net profit forecasts by 13-16% to reflect our higher CPO ASP assumption of RM2,800/t (previously RM2,600/t) due to poorer South American crop prospects and higher contribution from FR’s new refining capacity from 2013 onwards. We forecast capex for 2012 at US$175m (vs management guidance of US$200m) on slightly lower new planting assumptions. Buy for its growth prospects.