Fair Value : S$2.20 | Recom : Outperform

In line. First Resources’ (FR) 1HFY12 core net profit comprised 52-53% of our and consensus’ FY12 projections. However, we consider this to be in line, as we expect lower CPO prices in 2H to result in lower profitability in 2H12. FR recorded a net EI gain of S$6.9m in 2Q12, comprising mainly of gain on forex of +S$1.1m and gain on derivatives of S$5.76m.

Core net profit up 51% yoy on 66% rise in turnover. 1HFY12 revenue rose 66% yoy due to higher CPO prices achieved (+2% yoy), higher CPO sales (+45% yoy) despite CPO production only rising 21% yoy and higher refinery volumes (>100%). However, EBIT margins were lower yoy (-10.9%-pts), due to higher amount of plasma FFB purchased (+37% yoy) and higher export taxes paid due to higher amount of export sales.

Key highlights:

1. CPO price achieved was US$920/tonne in 2QFY12;
2. More CPO and PK stocks brought forward from FY11 were sold in 2Q12;
3. YTD-Jul production growth is 19.9% yoy. Management is still maintaining its expectation that the rate of growth will moderate in 2H12. Previous guidance was 10% growth, in line with our forecasts, although there could be upside risk to our forecasts, given the still strong +21% yoy growth seen in Jul;
4. Unit production costs in 1H12 was higher yoy, due to higher plasma purchases as well as higher fertiliser and wage costs due to the larger scale of operations and wage inflation. We have projected overall production costs to increase by 8-10% in FY12;
5. FR planted up 1,517ha of new land in 2QFY12, bringing 1H12 new planting to 4,183ha. Management seems to have lowered its guidance of new planting to 12,000-15,000ha (from 15,000ha) for FY12;
6. Refinery margins have fallen to US$73/tonne in 2Q12 (from US$89/t in 1Q12), bringing 1H12 margins to US$81/t, still slightly higher than our projected US$77/tonne.

Risks. Main risks include:

1. a convincing reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price trend;
2. weather abnormalities resulting in an over- or under-supply of vegetable oils;
3. increased emphasis on implementing global biofuel mandates and trans-fat policies; and
4. a quick global economic recovery, resulting in higher-than-expected demand for vegetable oils.

Forecasts and Investment case. No change to our forecasts. We have, however, raised our fair value to S$2.20 (from S$2.10), based on a higher target PER of 13x CY13 earnings (from 12x), as we believe FR is a rare stock which will continue to benefit from the Indonesian export tax structure and deserves to trade at a smaller discount of 1-2x versus its Malaysian peers of 14-15x. Maintain Outperform.

Source: RHB Research - 15 August 2012