First Resources: 1Q09 prices locked-in too early

1Q09 prices locked-in too early. First Resources (FR) reported 1Q09 net profit of Rp57.4b (-85% q-o-q, -59% y-o-y), mainly because average selling price achieved (Rp4,843/kg) dropped by 37% y-o-y and 27% q-o-q and was below average spot of Rp6,182/kg. FR had locked in over 50% of its production at the lower end of 1Q09 price range as the group had anticipated prices to deteriorate further. FR also had some outstanding sales that missed 1Q cutoff date; although volumes were not significant.

Translational FX losses further dragged profits. The lower profit was also caused by Rp46.4b translational FX losses on its USD notes and Rp24.6b mark-to-market losses for its cross currency swap contract. Stripping out the translational losses, annualized net earnings were in line with our forecast and slightly ahead of consensus.

Forecasts revised to include higher CPO prices. In line with our recent CPO price upgrades to RM2,300 (FY09F) and RM2,300 (FY10F) from RM1,900 and RM2,000, respectively, we have revised FR's FY09F and FY10F EPS by 21.5% and 14.4% to Rp546 and Rp625.

Buy call maintained, TP raised to S$0.70. We expect FR's subsequent quarters' results to improve substantially on the back of strong CPO price recovery, seasonally higher production level and reduced FX losses. Based on our revisions, the counter's valuation was, hence, upgraded to S$0.70, based on 30% discount to DCF (WACC 14.4% and terminal growth rate 3%). Maintain Buy.

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