First Resources Ltd - Stronger output prospects in FY17
- Young estates and more favourable weather offer strong output growth prospects.
- This, coupled with 17k ha of new area, is expected to drive output growth in 2017.
- Maintain Add, with target price of S$2.32 (13x forward P/E).
Young and efficient estates
- We continue to favour First Resources for its young estate profile (average age of ten years) as this bodes well for its output growth prospects, which will be led by the new mature areas (24% of its estates are immature), improving yields from young estates (which covers 26% of the group’s planted area) and ongoing rehabilitation of its newly-acquired estates.
Lower yields dragged down FY16 output
- FFB production from its nucleus estates fell 12% in 10M16, broadly in line with the group’s guidance of -10% in output, as yields were negatively impacted by the drought caused by El Nino in 2015. However, the impact of El Nino has started to fade, with FFB output from nucleus estates growing 5.5% yoy in Oct 2016.
Higher production in FY17 as El Nino impact fades
- The group revealed that weather has been good across all of its estates in 2016 and that the El Nino impact has gradually tapered off. On top of this, the group indicated that 17k ha of estates will come on stream in 2017.
- We project First Resources to post double-digit growth in output in 2017 as palm trees recover from the El Nino and a low production base.
Appointed biodiesel supplier to Pertamina
- The group owns 850k tonnes of refining capacity, allowing the group to refine all of its CPO in-house and extract better profit margins for its palm products. Its biodiesel plant in Indonesia stands to benefit from the higher demand in the country following the government’s moves to raise its biodiesel mandates to 20% blend in 2016 from 15% currently.
- The group was appointed to supply 55,338 kilolitres of biodiesel to Pertamina during Nov 16-Apr 17.
Potential tax credit in 4Q
- The group revealed that it has revalued some of its plantation assets to take advantage of the lower 3% tax rate on revaluation gains, down from 10%. This exercise will allow FR to benefit from lower income taxes and book in some deferred tax income upfront. It expects to book some of these benefits in 4Q but said that it will not be significant. This could lower its effective tax rate for 4Q16 from 30% in 9M16.
- First Resources is our top pick among the regional planters due to its superior operating efficiency compared to peers, strong FFB output growth prospects and attractive P/E valuations vs. peers.
- We maintain our earnings forecasts and target price of S$2.32 (based on FY18 P/E of 13x, its average historical P/E).
- We keep our Add call due to its estates’ young age profiles (50% of planted estates below seven years old).
- Key re-rating catalysts include stronger-than-expected earnings. Key risks are lower CPO prices and production.