First Resources Part 6 (2016 Q3 result)

Just sold the shares at 1.945 one hour ago. Bought it at 1.635 in May. That’s ~18% return after costs in 6 months.

Q3 result was good. Net profit was up 26.2% yoy to USD 35.9m, mainly due to higher average selling prices and higher sales volumes. Double positive.

Q3 revenue was up 40.6% yoy, but you shouldn’t get too much excited about the revenue because it’s substantially affected by how much they refined the crude palm oil into refined products. Refinery business has very low margin (around 2-5% now), hence it can increase the revenue significantly but only marginally for the profit. If you don’t quite get it, it’s ok. Just focus on the net profit and production figures.

First Resources - Financial 16Q3.PNG

Source: First Resources FY16 Q3 Presentation

Q3 production volumes continued to be negative, but saw less pronounced declines as compared to 2016 H1. This may signal that the impact of drought from 2015 is gradually tapering off.

First Resources - Production 16Q3.PNG

Source: First Resources FY16 Q3 Presentation

Crude Palm Oil (CPO) price shoots to RM 2800-2900/mt for the past few days. The supply shortage across the industry for this year has been expected as the lagged effect of the severe drought in early 2015. This is something that I learned while covering the palm oil industry. I used this edge to trade First Resources several times over the past 1.5 years with successes.

The rally in CPO price drives First Resources’ share price to 1.96 today.

First Resources - share price - 2016-11-11.PNG

Source: Google Finance

Here are my reasons to sell First Resources:

  • Current CPO price of RM 2800-2900/mt is very high in my opinion. This happens due to supply squeeze. Palm Oil supply is falling by more than 10% yoy this year. This itself drives the price higher as the demand remains relatively stable. As palm oil enters seasonally low production cycle for next 6 months, supply is likely to continue low. However, we have to remember that the short supply is mainly caused by the drought in early 2015, which will gradually taper off. As it tapers off, supply will be back to normal level and this will pull the price down.
  • While the CPO price is high, we can’t just value the companies mark-to-market based on the price alone. The production has been down substantially. For First Resources, CPO production for first 9 months of 2016 fell 13.3% yoy. Therefore, the advantage of higher price is partially offset by lower production.
  • My fair value estimate for First Resources is 1.95 – 2.00. I mentioned that in my earlier post. In my first post, my estimate was even higher at 2.10 – 2.45, but I have adjusted my estimate as the story developed and cost rose. The share price hit my estimate level today after a strong 6% rally. Initially, I wanted to wait for it to hit higher prices (> 2.0), but my second point above reminds me that the palm oil players are not actually reaping all the benefits of higher CPO price. They suffered from lower production, which was the reason that drove the price higher.
  • First Resources’ Q3 production was getting better than its H1 production. Similar thing happened at Bumitama. These two players have strong growth profile. The rest of the industry have not recovered yet, but I see the first sign of recovery in supply.
  • I might have sold too soon. The momentum could carry First Resources to above 2.10 and I could miss out 8% point additional gain. But, I trade based on my fair value estimate of 1.95-2.0. So, I sold it and added to my position in Bumitama at 0.73 per share. The market has been ignoring Bumitama lately, especially after its disastrous Q2 production. But, its Q3 production has improved substantially. So, I increased my bet on it.
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