First Resources

First Resources: First Resources' 3Q14 results missed estimates with net profit down 16.1% y/y to US$43.1m, taking 9M14 earnings to US$114.2m (-25.2%). Revenue fell 2.8% to US$148.8m, largely due to a 11% decline in CPO sales to US$121.8m, offset by higher palm kernel (PK) sales of US$17.1m (+39%) and higher refining and processing sales volumes of US$131.4m (+239%). Gross margin however narrowed to 57.6% from 63.3%, squeezed to the lower average selling prices (ASP) of CPO and its refined products. CPO sales volume increased 14% to 184,668 tons but ASP slid 21.8% to US$660 per ton, while PK sales volume was flat at 36,920 tons but ASP surged 39% to US$463 per ton. Meanwhile sales volume for the processing business jumped 277% to 183,294 tons after the expansion of its refining capacity. Helping to stem the profit decline was a 45% drop in selling and distribution expenses to US$5.6m due to higher proportion of refined palm oil exports, which attracted lower export taxes as opposed to CPO. This was offset by higher effective tax rate of 31.7% versus 17.9% in 3Q13, which led to higher tax expenses of US$21.2m (+82%) Looking ahead, CPO prices have recovered from its recent lows in Aug, partly due to lower-than-expected inventory levels in Malaysia and Indonesia. However, prices are expected to remain soft, weighed by weakening demand for biofuel and the sizeable soybean harvests in the US. The group however remains positive on the longer-term outlook of the palm oil industry and expects moderate volume growth in 4Q. Over the longer term, the favourable age profile (weighted average age of ~8 years) of its plantations will continue to propel production volume growth. At the current price, First Resources trades at 15.4x annualized 9M14 P/E versus peers Bumitama’s 14.9x forward P/E and Golden Agri’s higher forward P/E.