First Resources

Kim Eng on 10 Apr 2012

Raising earnings on higher CPO ASP forecast. Worsening South American crop prospects have pressured soybean and CPO prices in recent weeks. We raise 2012-14 net profit forecasts by 10-15% mainly to reflect our higher CPO ASP assumptions. Further upside could emanate from higher-than-expected FFB output for 2012. Reiterate Buy with a higher TP of S$2.15 (+10%) on an unchanged 14x 2013 PER.

Promising FFB growth for 2012. For Jan-Feb 2012, FR recorded a 24% increase in FFB production (see Figure 1), against our 9% FFB production growth estimate for 2012. Still we think it is too early to change our 2012 FFB assumption, although these are early signs of outperformance. FR does not seem to share the view of tree stress kicking in for 2012, at least not for Indonesia.

Focus on fractionation plant. FR’s fractionation plant was running near full capacity in 1Q2012, enjoying high downstream margins resulting from the export tax differentials between CPO and processed palm oil of ~8-10% for each tonne of palm oil. The high utilisation rate came at the expense of its biodiesel plant, which lay idle. Demand for palm biodiesel typically kicks in during the summer months in Europe.

Downstream expansion on track. FR is on track to complete its refining and fractionation capacity expansion to 850,000t/year (+240%) by 1Q2013. Its expansion plan stems from (i) its strong expected 3-year forward FFB CAGR of 9% to 2.5m tonnes of FFB (or 0.59m tonnes of CPO equivalent) by 2014, and (ii) the present high downstream processing margins. In 2011, FR posted a fat EBITDA margin of USD189/t although over time, this should normalise to around USD70/t.

Still a Buy.The deterioration of South American crop prospects over the last month has further tightened global supplies of soybeans, prompting us to revise our CPO ASP forecasts upward. We raise 2012- 14 net profit forecasts by 10-15% to reflect our higher CPO ASP estimate of RM3,150/t (2012; +12.5%) and RM3,000/t (2013-14; +7.1%) from RM2,800/t (2012-14) previously. FR’s single-tier tax exempt final DPS of SGD0.025 will go ex on 14 May 2012.