First Resources part 2.1

Q2  result wasn’t pretty. See their Q2 presentation here.

15Q2 results
15Q2 results

Q2 revenue rose by 5.9% yoy, net profit +9.8% yoy, but EBITDA fell by 6.2% yoy. For 6mth results, revenue dropped by 25.9% and net profit -20.8% yoy.

As predicted, refinery business continued to suffer with nearly non-existent margin. 6mth refinery EBITDA fell from 18.4m to 2.3m. If not for the strong sales volume in Q2 (CPO +28.6% yoy), Q2 financial results would have been ugly. The upside is that there is still 22,000 tonnes of inventory to sell. That’s more than $11m of additional revenue (or extra 10%) if sold.

What caused the big drop in earnings?

  1. lower CPO selling price. The biggest impact
  2. lower refinery volume and margin
  3. increased G&A expense. The quarterly reports says due to higher costs of remuneration and lower write-back of accruals for employee related expenses in 2015. Not very clear to me. Is it because of higher labor costs with higher minimum wage in Indonesia?
  4. higher forex losses

Share price fell to 1.79, the level I recommended buying 3 months ago. Is it still a BUY at this price?

What’s more concerning is that CPO price fell below RM 2000/t today yesterday. With peak production season coming, you can expect CPO price to stay low for near term. I just hope it won’t have another sharp drop in September, like what happened in 2012, during which I started following palm oil sector. Every analysts were saying that the drop was temporary and would bounce back. After several months, everyone acknowledged that the drop was real and gradually adjusted their target price down to the level the CPO price was at.

With all the negative news factored in, you can expect bad year for palm oil players. If you are an investor based on TTM P/E ratio, then it’s yelling a SELL now because this year’s earnings won’t look good. However, if you invest based on forward P/E, then current share price may look fairly attractive. If you do analysis and understand the business, then you should do forward earnings estimation. Historical data doesn’t matter. However, if it’s fast growth stock, be sure your high growth assumption can be justified.

What’s my take? Back to the question above, is it still a BUY at this price?

Given all the near term information, I will HOLD for the moment. I could be wrong in expecting CPO price to have strong support level at RM 2000/t. Will just stand aside and follow the development. If this level is a strong support level, then I will BUY again. As I mentioned in earlier posts, our opinion to buy/sell doesn’t matter. It’s our action that matters. If I yell BUY now but do nothing, then you should not believe what I say.

Will let you know when I change opinion and take action.


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