We  continue  to  like  First  Resources  (FR),  despite  expecting  lower production growth over the next two years, as its earnings delivery has been  rock  solid.  The  stock  is  inexpensive,  trading  at  just  11x  FY14 earnings.  Going  into  2H,  FR  will  ramp  up  its  biodiesel  production  to take advantage of the spread between palm oil and biodiesel prices as biodiesel margins are significantly better than refining margin.

- 1H  ahead  of  our  expectations.  FR's 1H core earnings  came  in  at USD104.9m, ahead of our full-year forecast of USD163.7m. Most of the strength came from 1Q, during which FR sold down its inventory buildup at end-2012. Still, even if its core earnings for the remaining two quarters are  similar  to  2Q's  USD41.0m,  our  profit  forecast  appears  easily beatable. We are lifting FY13 net profit forecast to USD167.6m to factor in  higher-than-expected  realised  crude  palm  oil  (CPO)  price,  albeit dampened by lower production growth. We also tweak down FY14 profit forecast to USD194.4m to factor in more lacklustre production growth.  

- Suffering  from  tree  stress.  Management  has  lowered  its  FY13 production growth forecast to 0-5% compared with 10% growth expected earlier.  Management  believes  production  recovery  in  FY14  will  be  slow although it is unable to give guidance at this point in time.  

-  Inventory  buildup.  FR's  sales  volume  for  CPO  and  refined  products declined  by  14.4%  and  30.4%  q-o-q  respectively  due  to  lateness  in shipping,  hence  the  sales  were  not  recognised  in  2Q.  Management indicated that the inventory buildup during the quarter amounted to some 30k tonnes.  

- Guiding  down  on  new planting.  FR's new  planting  (including  plasma) in 1H amounted to 6,755 ha. The planting target has been revised down to  12-15k  ha,  compared  with  15-20k  ha  earlier,  of  which  20%  will  be plasma.  

- Downstream  strategy.  Given  the  thin  refining  margin,  FR  will  ramp  up its  biodiesel  production  in  2H  to  take  advantage  of  the  latter's lucrative margin.  We  note  that  Indonesia's  FOB  biodiesel  price  is  now  at USD913/tonne.  

Source: OSK