Focusing and expanding on upstream business. FR plans to expand its upstream business through expanding its plantation business with long-term target of about 200,000ha. Currently, FR owns about 170,000ha of landbank and planted area of 100,300ha (nucleus and plasma). It will only expand its downstream business once its crude palm oil (CPO) production hits 1.0m tonnes. In 2008, it produced about 323,000 tonnes of CPO.
Higher CPO production coming on stream in 2H09. On the back of the usual seasonality patterns in 1H09, FR expects 2H09 CPO production to exceed 1H09 by about 18%. It targets a 10% yoy increase in CPO production in 2009 and another 10% yoy growth in 2010.
Most CPO production would be sold on “spot-basis” in 2H09. FR has a selling policy to maintain forward selling by not more than 40% of total CPO production. In 2H09, FR expects most of its CPO production to be sold on “spot-basis”. It sells only about 15% of its production based on forward contract. Its long-term contract with Wilmar is expected to expire by the end of 2009.
We raise our net profit forecasts for 2009 and 2010 by 4% and 3% to Rp619b and Rp886b respectively after fine tuning our models given a stronger rupiah vs the US dollar.
Downgrade to SELL with a higher fair price. As we rollover our PE valuation into 2010F, we raise our fair price from S$0.39 to S$0.90, pegged at 10x 2010F PE (small-cap, upstream player). However, as the share price of FR has exceeded our fair price and we remain cautious on its earnings volatility, we downgrade the stock to SELL. We prefer Indofood Agri Resources (BUY/Target: S$2.00) on better earnings visibility and undemanding valuation of 11.4x 2010F PE.
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