We remain positive on First Resources (FR)’s earnings performance on decent output and yield prospects.
We expect earnings to grow by 13% y-o-y to US$149m on the back of flat ASP and volume expansion. Yield performance will also help to keep First Resources’ cost per hectare low.
We believe First Resources’ young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on maturing trees will improve First Resources’ ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead.
First Resources’ aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong volume and earnings growth in FY19F.
We believe consistent earnings delivery should move First Resources’ stock price higher. Moreover, a more stable CPO price outlook will mean that First Resources’ earnings growth will be driven by volume and CPO yield expansion.
We employed DCF methodology (FY19F as base year; WACC 11.8%; TG 3%) to arrive at a slightly lower fair value of S$1.97/ share after imputing our earnings forecast adjustments.
Balance sheet deleveraging potential.
On our estimates, First Resources’ debt cost is a paltry 3.9% p.a.
The low cost comes primarily from Sukuk issuances between 2012 and 2014 – which were subsequently swapped into USD. While the group had indicated its intention to refinance maturing Sukuk this year, we are maintaining our debt profile forecast for now. The group’s net debt-to-total equity ratio is projected to be 10% at end- December 2018 vs. 20% at end-December 2017.
Strong free cash flow generation.
We expect the group to spend US$2.2m in FY18 (c.2,000 ha on new planting and 15,000 ha immature). This would translate into free cash flow generation of US$202m in FY18F and US$230m in FY19F – translating into free cash flow yield of ~9% relative to its intrinsic value.
Trading at a discount.
The stock is currently trading close to - 1SD from its average historical PE. We believe consistent earnings delivery in FY18 should move the stock price higher.
Volatility in CPO prices and USD exchange rates.
Setback in expansion plans.
Regulatory changes.
Market sentiment.
Source: DBS Research - 10 Oct 2018
Chart | Stock Name | Last | Change | Volume |
---|