First Resources

DBS Group Research, Feb 26

FIRST Resources (FR) reported Q4 2013 net profit of US$64 million (+36 per cent y-o-y; +25 per cent q-o-q), excluding US$1 million of foreign exchange gains and US$30 million gains from biological assets revaluation.

This was 33 per cent higher than our Q4 2013 core earnings forecast of US$48 million; and brought FY2013 earnings of US$217 million or about 8 per cent above our expectations.

The difference came from about 40 per cent higher biodiesel volume (which yielded better margin than RBD Olein) and higher forward average selling price (ASP). The group had also drawn down about 20,000 metric tonnes (MT) of crude palm oil (CPO) inventory as of end-December 2013.

But fresh fruit bunch (FFB) yields have dropped. FR produced 590,503 MT of own FFB (+14 per cent y-o-y; -4 per cent q-o-q) and 173,218 MT of CPO in 4Q13 (+19 per cent y-o-y; flat q-o-q). FFB yield dropped to 5.7MT/ha for the quarter, while oil extraction rate (OER) eased to 23.1 per cent from 23.2 per cent in the previous quarter.

New planting came in at 4,700 ha in Q4 2013 - bringing total expansion to 15,000 ha for the full year, excluding 8,634 ha from acquisition of Lynhurst in February 2013.

Balance sheet remains strong. Cash conversion cycle shortened to 72 days from 81 days at the end of previous quarter, given the drop in inventory days. Total borrowings (excluding derivative financial liabilities) declined to US$490 million at the end of December 2013 (from US$493 million at the end of September 2012), translating into debt/total equity ratio of 21 per cent - from 24 per cent booked at the end of previous quarter - mainly on account of a higher cash level.

FY2014/2015 earnings forecasts are tweaked by -3 per cent/-4 per cent to impute lower ASP on refined products (given expiry of forward sales) and slightly higher FFB output (after imputing FY2013 yield).

We also raised the group's biodiesel output to 108,000-112,000 MT over the next three years from 75,000 MT - given better-than-expected output in FY2013. These changes, alongside updated beta, led to discounted cash flow (DCF) estimate of S$2.22.

We recommend "hold" for 2 per cent dividend yield. We believe FR's superior performance (considering a weak CPO price environment) has already been priced-in in recent rally. We caution that expiry of forward sales may show normalised ASP, while the dry weather since end-January 2014 may adversely affect output in Q1 2014.

Currently strong CPO ASP may be weakened by volume recovery in H2 2014. Pending further analysis, we are maintaining our CPO price forecasts.

HOLD