BUY S$1.31
Price Target : S$ 1.70 (Prev S$ 1.75)
At a Glance
• 2Q11 net profit of US$36.7m (+258% y-o-y) slightly below expectations.
• CPO volumes +21% q-o-q offset by -8% in ASP. Interim dividend of S$0.01 declared.
• FY11-13F adjusted by -7.1% - +0.2% on revised FX and CPO prices, and lower refined volumes.
• Sales to pick up in 2H11. Buy call reiterated, TP of S$1.70 price.
Comment on Results
First Resources (FR) reported 2Q11 net profit of US$36.7m (+258% y-o-y and +20% q-o-q), slightly below our forecast on annualised basis, as the group has not yet deliver some of its presold inventory. This inventory included export-bound biodiesel, which has longer lead times for shipment. FR also achieved +11% q-o-q revenue growth to US$100.3m despite -8% fall in ASP due to 21% jump in CPO volumes. Net margins improved to 36.6% from 33.7% in 1Q11 as a result of superior oil extraction rates which stood at 23.9% (23.6% in 1Q11). 1H11 new plantings of 6,053ha are on track to achieve our FY11 estimate of 12k ha. Finally, investments in 3 new mills raised net gearing ratio (including MI) to 25% from 9% at end of Mar11. An interim dividend of S$0.01 was declared.
To account for a cut in refined volumes and slightly lower realized CPO ASP, FY11-13F earnings are adjusted by -7.1% - +0.2%. Longer-term, we also lowered FY13F-20F CPO prices (in MYR terms) by c.3%, and FX forecasts (in favour of stronger regional currencies). We also added biodiesel as part of refined product mix with ASP pegged to c.150% of Brent crude minus export tax.
Recommendation
FR is our preferred upstream planter, as 54% of trees are classified in the immature and young stage and should deliver 10.5% CAGR in FFB production (FY11-14) translating to 3-year EPS CAGR of 9.7%, despite a projected 20% fall in CPO prices over the coming year. With 2H seasonal uptick in volumes and margins, we reiterate our Buy call with TP of S$1.70 (revised down slightly from S$1.75 post earnings changes) implying 31% upside.
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