First Resources - 1H12: A Strong Performance

Target Price: $2.15 | BUY | Upside 12%

Maintain BUY. We expect FR to report flat QoQ net profit of ~USD49m for 2Q12 (+33% YoY) on flattish ASPs and FFB output. Even so, FR’s estimated 1H12 net profit of ~USD98m (+46% YoY) would have met 57% of our former FY12 estimates. We now raise FY12-14 net profit forecasts by 5.2-6.8% to reflect higher FFB output assumptions. But, our TP is unchanged at SGD2.15 (on 14x FY13 PER) as our earnings upgrades were offset by the surprise conversion of FR’s USD98.1m in Convertible Bonds (CB) in 1H12, despite expiring only on 22 Sep 2014.

1H12 FFB output up 17.7% YoY. FR’s 2Q12 FFB (nucleus) production was up 3.7% QoQ to 426,704 tonnes (+14.1% YoY), while 1H12 production of 838,069 tonnes (+17.7% YoY) met 45% of our previous FY12 forecast. This is above our expectations considering the average 1H:2H production ratio in the last four years was 43%:57%. Meanwhile, MPOB’s spot CPO ASP has been flat QoQ at MYR3,218/t (-4% YoY).

Downstream margin still strong. FR’s refinery continues to run at near full capacity given the good margins that Indonesian refiners enjoy presently. We expect its 2Q12 downstream EBITDA margin to be just as good, if not better, than the USD89/t recorded in 1Q12. FR has been producing mostly palm olein (i.e. cooking oil) and palm stearin in 1H12, while its biodiesel plant remains largely idle.

Raising our FFB output assumptions. Following the strong FFB output in 1H12, our earlier FY12 FFB growth assumption of 8.7% appeared conservative. Hence, we raise this to 11.6% or 2.116m tonnes (a 2.7% increase over our previous FFB output forecast). Correspondingly, we raise FY13-14 FFB output assumptions by 2.4% and 2.2% respectively. Our FY12/13/14 net profit estimates are now raised by 5.2%/6.8%/5.2%, largely on the revised FFB output assumptions.

EPS marginally diluted by CB conversion. Despite our raised net profit forecasts, our FY12-14 EPS forecasts were diluted by a marginal 1-2% following the conversion of FR’s USD98.1m CB into 114.34m new FR shares (+7.8% existing shares) during 1H12.

Early conversion of Convertible Bonds due in 2014. FR’s USD98.5m of outstanding CBs (as of 31 Dec 2011) were either fully converted or redeemed in 1H12, much to our surprise, as they expire on 22 Sep 2014 (see below for more details). This resulted in 114.34m new FR shares (+7.8% of FR’s share capital as of 31 Dec 2011) being issued to CB holders who exercised their conversion options for a nominal value of ~USD98.1m in total, while the CB’s remaining principal amount of USD0.4m was redeemed in cash.

[Recall that on 22 Sep 2009, FR issued USD100m of 5.625% CBs (due on 22 Sept 2014) at 103.34% to give an effective yield-to-maturity of 6.375%. The CBs were convertible into new FR shares at an initial conversion price of SGD1.24735 per share (with a fixed exchange rate of SGD1.4479 to USD1.00).]

Strengthens its balance sheet. The CB conversion has strengthened FR’s balance sheet. On a proforma basis, FR’s net gearing of 10% as of 31 Mar 2012 would have dropped to 1% following the conversion. And while the conversion is EPS dilutive, it nonetheless lifts the share overhang concern which has prevented FR from realising its full potential value.

Cheap Ringgit funding. Separately, on 25 Jun 2012, FR established a Ringgit-denominated Islamic medium term note (IMTN) programme of up to MYR2.0b (or USD635m) to tap into cheap funding available in Malaysia. On 31 Jul 2012, FR had drawn down MYR600m (or USD190m) from this IMTN programme. The IMTNs have a tenor of five years (maturing on 31 Jul 2017) and will bear a periodic distribution rate of 4.45% p.a., payable semi-annually in arrears. The interest cost is priced at ~150bps above the 5-year Malaysia Government Securities. We view the IMTN as a cheap source of funding for FR, whose average borrowing cost was ~10% prior to this issuance. The net proceeds raised from the IMTNs will be utilised for FR’s general corporate expenses which are in compliance with Shariah principles. Given FR’s low net gearing prior to the issue and strong yearly cash flow generation, its net gearing post the IMTN issue is still expected to be low at 6.6% (as of 31 Dec 2012). We have adjusted our earnings forecasts to reflect this new funding facility.

Source: Maybank Kim Eng Research - 13 August 2012