First Resources

Kim Eng on 16 May 2012

Solid 1Q profit. While most plantation stocks have reported weaker 1Q results so far, FR’s 1Q12 core net profit of USD49m (+60% YoY, -2% QoQ) was above our and street estimates. Seen in this light, its recent share price weakness is unjustified. Trading at 11x 2013 PER, we reiterate our BUY call and TP of SGD2.15 based on 14x 2013 PER.

Boost from sales growth. FR’s 1Q results met 28.5% of our full-year forecast and 26.2% of consensus estimates. Its net profit growth was mainly boosted by sales revenue growth of 82% YoY (+4% QoQ), underpinned by higher volume sales of CPO (+34% YoY, -6% QoQ) and refined palm products (+4,748% YoY, +22% QoQ). The growth in volume more than offset the decline in CPO ASP sold in 1Q12 at USD932/t (-11% YoY, -3% QoQ).

Beneficiary of Indonesia’s export duty. FR’s fractionation plant was running near full capacity in 1Q12, enjoying good downstream margins of USD89/t due to the export tax differentials between CPO and processed palm oil of ~8-10% for each tonne of palm oil. However, increased refining and processing activities in 1Q12, which generated lower margins vis-à-vis its upstream operations, resulted in FR posting a lower core EBIT margin of 45% (-12 ppt YoY, -11 ppt QoQ).

Expansion on track. FR achieved 2,666ha of new planting area in 1Q12, meeting 22% of our full-year estimate of 12,000ha (but lower than management’s internal target of 15,000-20,000ha). Meanwhile, it is on track for the commissioning of its 10th 45t/hr CPO mill and 105,000tpa kernel crushing plant in 2H12 to further boost earnings. This will help sustain FR’s medium-term growth prospects.

Earnings forecasts intact for now. FR recorded 4M12 FFB (nucleus) production of 539,407 tonnes (+19% YoY) or 29% of our full-year forecast. This is ahead of our expectations although we understand that the stellar growth rate may moderate going forward. Coupled with recent weakness in CPO price, we are inclined to keep our earnings forecasts for 2012 unchanged for now. Our CPO ASP estimates of MYR3,150/t (2012) and MYR3,000/t (2013-14) remain unchanged.