BUY
Price S$1.495
Previous S$1.68
Target S$2.05
Our fair value for First Resources (FR) is raised to S$2.05 from RM1.68 previously, following our upgrade of CY12 average CPO price assumption to RM3,000 from RM2,700 previously. FR remains as our top sector pick, having a good blend of long term growth prospects, strong current production growth, undemanding valuation and balance sheet strength. FR, having a refinery in operation now, is benefiting from the reduction of Indonesia’s export duty for refined palm oil. Maintain BUY.
Strong production YTD. FR’s 3Q11 nucleus FFB production came in at 510,169 tonnes (+17.1% YoY). This brings FR’s cumulative nucleus production to 1.2m tonnes, up 21.6% YoY. We expect 4Q production to soften sequentially due to seasonal onset of production downcycle. We do not expect 2012 production to repeat this year’s pace and will normalise, but nonetheless a strong 9.8% growth.
Boost from downstream. FR’s refinery was only running at 35.4% utilisation for 9M11, which means it has spare capacity to exploit the benefit of lower export tax for refined products commencing Sept 11 in Indonesia. We have estimated earnings from its refining unit to come in at US$4.6m for FY11 and US$6.8m in FY12, based on a utilisation rate of 55.2% and 80% respectively.
Upping CPO price assumption to RM3,000/tonne. We raise our FY11 and FY12 FFB production estimates by 3.8% and 3.4% respectively and raised our cost of sales and expenses. In addition, we raised our FY12 CPO price assumption from RM2,700/tonne to RM3,000. We have also incorporated refinery earnings as mentioned above. Consequently, our FY11 earnings forecast is upped by 7.3% and FY12 forecast is lifted 16.3% to US$147.4m and US$173.6m respectively. Maintain BUY with a higher TP of S$2.05.
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