Reiterate BUY on FR for its good track record of delivering good productivity, it
being a beneficiary of the new policies in Indonesia and high leverage on CPO price
movements. Based on our re-rated valuation, FR offers 59% upside from its current
share price level if a strong El Nino occurs. Its FFB production growth is on track to
meet our expectation of 9-11% for 2015. Going forward FR will slow down in new
planting activities and focus on sustainability. Target price: S$2.40.
• First Resources’ (FR) share price delivers the best performance among the
Singapore listed plantation companies, as crude palm oil (CPO) and soybean oil prices
recover post biodiesel-friendly announcements by Indonesia, Malaysia and the US.
Based on our recent marketing trips, FR remains as investors’ favourite pick given its
good track record to deliver better-than-peers’ performance and good stock liquidity that
fit the requirements of larger foreign funds. Its ability to leverage on Indonesia’s policies
that encourage value added downstream operations and good production growth will
continue to drive its performance.
• Beneficiary of new policies in Indonesia. FR’s downstream operations would likely
benefit from the implementation of export levy starting on 1 Jul 15. The tax difference
between CPO and refined products of US$20/tonne will give refiners a margin buffer.
Besides that, the biodiesel subsidy which will be supported by the Crude Palm Oil
Supporting Fund’s (CPO Fund) collection of export levy, and the increase in biodiesel
mandate would help support FR’s biodiesel production in Indonesia. FR is among the top
5 biodiesel producers in terms of installed capacity in Indonesia.
• High leverage on CPO prices. FR stands to benefit from the rising CPO price trends as
it is sensitive to CPO price movements due to its good production growth. CPO prices
tend to react positively to the El Nino phenomenon. If El Nino turns out to be a strong
event, CPO prices are likely to rally. For every RM100/tonne increase in CPO prices, FR’s
EPS would increase by 10.5% from our forecasted 2016 EPS. Besides that, the sector
will be rerated to 1 SD above its valuation during a strong El Nino event. Based on the
rerated target price of S$3.19, there will be 59% potential upside to FR’s share price.
• Focus on sustainability. Going forward, FR will be focusing more on sustainability. It is
conducting the high carbon stock study for its landbanks to comply with the stringent
sustainability requirements. Thus, it has slowed down its new planting activities. FR
targets to plant about 5,000-10,000ha of new area in 2015, much lower than 24,000ha
planted in 2014. So far, it has planted about 1,984ha in 1Q15 (1Q14: 7,622ha).
• Young age profile to support marginal growth even if El Nino hit. During the
previous El Nino in 2009/2010, FR still delivered positive FFB production growth of 2.6%
yoy although it was much lower than previous year of 10% yoy. Given its still young age
profile with an average of 9 years, in the event that El Nino happens in late-15 to early-16,
FR is expected to deliver low-single-digit FFB production growth vs norm of 10-12%.
• FFB on track to meet expectations. Its fresh fruit bunch (FFB) production growth of
18% yoy in 4M15 is on track to meet our expectation. For the full year of 2015, we are
expecting FFB production growth of 9-11% mainly coming from yield recovery and an
increase in new mature area (about 10% of total mature area). Going into 2H15, we
expect production to continue to pick up but production trends are likely to be distorted by
less harvesting rounds during the fasting month starting mid-Jun 15 and the Ramadan
holidays in Jul 15 before picking up again in Aug 15.
• Better refining margin from the export levy. FR’s processing plant has a total
combined capacity of about 850,000 tonnes p.a., which is larger than that of its upstream
operation. The new export tax levy to be implemented on 1 Jul 15 will help boost its
downstream margin as there will be about a US$20/tonne spread arising from the
difference in export levy between CPO (US$50/tonne) and processed oil (US$30/tonne).
On the other hand, we expect increased processing activities in 2Q15 as compared with
1Q15 due to the rising demand during the festive season in Jul 15. The refining business
had suffered significantly in 1Q15 due to an unfavourable margin.
• Expect better biodiesel demand. With the setting up of the CPO Fund management
committee and collection of export levy effective 1 Jul 15, the disbursement of funds to
support biodiesel subsidies should be implemented soon. This will lead to higher
domestic biodiesel demand as Pertamina is now required to buy and mix diesel to meet
the 15% biodiesel (B15) mandate. We believe that the first biodiesel tender/demand from
Pertamina for 2015 blending will be announced soon. This is good news for FR as it has
a biodiesel plant with a capacity of 250,000 tonnes. So far, FR is focusing on its refining
operation as demand for biodiesel is subdued.
• Potential inventory drawdown in 2Q15. FR has built up inventory of 20,000 tonnes in
1Q15 which is likely to have been drawn down in 2Q15. This would have boosted sales
volume during the quarter. Besides that, although we have seen an increase in palm oil
exports in Indonesia in the past few months since the announcement of implementation of
export levy, companies might take this last opportunity to export more before the start of
the export levy in Jul 15.
• No change to our earnings forecasts.
• Maintain BUY and target price of S$2.40, based on 15x 2016F PE. We like FR as it is
a beneficiary of Indonesia’s new export levy and biodiesel policies. It also has a good
track record of delivering better-than-industry FFB yield and oil extraction rate (OER).
• In the event of El Nino, sector valuation would usually expand closer to 1SD above its
mean valuation. Based on a re-rated valuation, the implied target price is S$3.19, and
there will be 59% of potential upside to FR’s share price.
SHARE PRICE CATALYST
• Rally in CPO prices.
• Value enhancing acquisitions to expand planted areas given that new planting is getting
tougher given the more stringent requirements to comply with sustainability standards.
• Sustainability of better-than-peers’ downstream margin. (Read Report)
Source : UOB KayHian Research
Labels: CPO, First Resources, Palm Oil