Key bright spot: Strong FFB production. 3Q13 PATMI of USD51m (+36% QoQ, -20% YoY) took 9M13 to USD153m (-7% YoY); 76% of our and consensus full-year forecasts. While industry peers continued to see lower FFB production (due to biological tree stress), FR’s nucleus estates posted an 8.2% YoY rise in FFB output, aided by 10,000 ha of new mature area (Fig 2 & 3). FY13’s FFB output growth is set to be at the top end of management’s guidance of up to 5%, before accelerating to 15% in FY14. We maintain our forecasts but raise our TP to SGD2.39, based on 15x FY14 PER (previously SGD2.06 on 13x FY14 PER). The higher PER is justified on improving CPO price, its impressive track record and production recovery. Reiterate BUY.

No surprises. 3Q13 PATMI rebounded 36% QoQ on higher sales volumes (+30% QoQ) and lower fertilizer cost which offset lower CPO ASP at USD844/t (-7% QoQ). The lower QoQ CPO ASP achieved suggests that FR has exhausted a huge portion of its forward sales locked-in in early 2012 which led to its YTD earnings outperformance. That said, its 3Q13 CPO ASP of USD844/t remained higher than Indonesia’s benchmark price of USD680/t.

Slow recovery in downstream margins. FR posted a higher refining margin of USD64/t in 3Q13, off its 2Q13’s low of USD55/t. This was in part due to its strategic move to capture higher processing margins for biodiesel (vis-à-vis refinery) in 3Q13 by restarting its biodiesel plant. During 3Q13, FR had an inventory build-up of ~27k MT as sales volume of palm oil products was lower than production volume. Part of this inventory build-up was palm biodiesel with committed off-takers that will be recognized in 4Q13. In 4Q13, the 600k tpa new refining capacity (+140%) will come on stream.

Remain our top sector pick. We continue to like FR for its long term value proposition, backed by its plantable reserves of 100k ha, young trees of eight years old which will sustain 10% CAGR in FFB output (2012-15), and low cost of production

Source: Maybank Kim Eng Research - 14 Nov 2013