Target Price S$2.30
CPO production growth remains strong and may exceed our 2012 forecast of 8-10% yoy on higher external crop intake. Should CPO trade below an average of US$750/tonne, export tax rate for CPO would drop to zero, encouraging more CPO exports. We view this positively as FR’s focus is on its upstream operations. Maintain BUY and target price of S$2.30.
What’s New
- Production growth remains strong, on track to meet our expectation of 8-10% for 2012. First Resources’ (FR) crude palm oil (CPO) production remains strong with a 21% yoy growth for 8M12. Although production fell 9% mom in August, likely due to the less harvesting days during the Raya festival, FR still reported a strong double-digit yoy growth of 22% to 47,630 tonnes.
- Quick recovery from dip in share price. The recent dip in share price to S$1.94 (-5.6% from the previous day’s closing), in line with the sector performance, was mainly due to the sharp decline in CPO prices. However, due to its strong production growth prospects and the likelihood of outperforming our expectation, share price has rebounded rather quickly to S$2.00 the next day. We expect FR’s share price to continue on the uptrend to reflect production growth.
- May export more CPO if export tax becomes zero. If CPO prices drop to below an average of US$750/tonne for first 20 days of Oct 12, CPO export tax for November is likely to be
zero as Indonesia usually determines the export tax rate for the coming month using the average CPO price for the first 20 days of the current month. This would prompt companies to export CPO in November instead of further refining them domestically as the tax advantage arising from the export tax structure will disappear while refining margin will normalise, which will affect FR’s downstream business. Nevertheless, FR’s focus is still on the upstream operations (contributed about 93.2% of 2011’s EBITDA) and will only further refine CPO if it offers good margins.
Stock Impact
- CPO production to pick up in Sep 12. We expect CPO production to pick up again in Sep 12 after the Raya holidays. Also, based on historical trend, FR’s FFB production is likely to hit another peak in Sep/Oct 12 before tapering off by end-12. Nevertheless, FR's strong CPO production growth of 21% ytd is on track to meet our 2012 forecast of 8-10%, in line with management guidance. In addition, FR's CPO production growth may exceed our expectation. Every 1ppt rise in FFB production would lift our EPS forecast by 1%.
- Demand still intact. Although buyers are getting more cautious and only buying on a hand-to-mouth strategy, FR has yet to feel pressure from the slowdown in demand. Also, we believe demand for palm oil would pick up given current low CPO prices.
- Higher external crop intake to reduce overtime. We understand FR’s 10th (ready in 2Q12) and 11th mill will be taking more external crop until its oil palm trees in the nearby estates start producing fruits to maximise the utilisation rate. With the completion of its 11th mill, FR would have a total milling capacity of 3.78m tonnes (vs FFB production of 1.73m tonnes in 2011). FR reported a 43.2% yoy increase in external crop intake in 8M12. The high intake of external crop has helped boost its CPO production by 21% yoy in 8M12 (vs nucleus FFB production growth of 18%).
- Catching up in new-planting activity. FR has been catching up on its new-planting activity in 2H12 after a slowdown in 2Q12 due to stringent environmental regulation regarding land clearing activity. In 2Q12, FR planted only about 1,517ha vs 2,666ha in 1Q12. It is likely to meet the lower-end of its new-planting target of 12,000-15,000ha in 2012. It has completed about 11,421ha of new plantings in 2011.
Earnings Revision/Risk
- No change to our earnings forecasts.
Valuation/Recommendation
- Maintain BUY and target price of S$2.30, based on 14x 2013F PE, at mid-cycle valuation. FR remains our favourite due to its balanced age profile with 54% of immature and young oil palm trees to support its future earnings growth.
Share Price Catalyst
- Surge in CPO prices.
- Higher-than-expected demand for its refined products.
No comments:
Post a Comment