Here's the main culprit behind First Resources' sluggish CPO output

Still disappointing despite 10% jump.

According to DBS, First Resources reported Jun13 operating data today. 2Q13 CPO output was 126,797 MT (+10% y-o-y; +10% q-o-q) or 21% of DBS' full year target of 592,151 MT, weaker than the 24% DBS was expecting.

The culprit was a marked deceleration in own FFB production growth to 5% y-o-y from 14% booked in 2Q12, despite inclusion of output from recently purchased GSI (since Nov12) and Lynhurst (since Feb13).

Here's more:

Smallholders FFB output also fell 24% y-o-y (-14% q-o-q). We understand this reflects a slowdown after growing by c.40% p.a. in the past two years.

However, the drop was partly compensated by jump in third-party FFB purchases to almost 6-fold from the previous year (these were mainly purchased for the group's West Kalimantan mill).

Assuming there was no further inventory draw-down and the group achieved CPO ASP of US$900/MT (18% higher than spot due to forward sales), FR may book 2Q13 net profit of US$45-50m (down 21-29% q-o-q), in our estimate. This would have missed our previous estimate of US$50-
57m.

We understand output is expected to rebound in 2H13 and the management has not revised its guidance of 5-10% growth in own FFB production. We also expect smallholders' output to recover to match FY12 level by the end of this year.

Subject to changes to management guidance for 2Q13 results, we are maintaining our forecasts, TP and rating for the stock. FR's production will pick up again post-Eid festival in Aug13.

At current price, the counter is trading at undemanding 9.4x FY14F earnings. Any near term weakness would be an opportunity to accumulate the stock.