First Resources beats trending decline in fresh fruit bunches growth

Other companies registered drops in FFB production ranging from -1.0% to -16.7%.

According to UOB Kay Hian's analysis, all plantation companies it covers registered drops in fresh fruit bunches (FFB) production ranging from -1.0% to -16.7% in Q4 2017, except for First Resources (FR), which reported a QoQ increase but due to uneven recovery patterns depending on rainfall. 

UOBKH analyst Leow Huey Chuen noted that that the drought in Riau ended earlier than in Kalimantan. “FR registered a better qoq FFB production as most of its estates were in Sumatra where the lagged impact from the drought ended earlier. Companies which have the majority of their estates in Kalimantan, such as Bumitama Agri (BAL) and Dharma Satya Nusantara (DSNG), showed qoq declines in FFB production in Q4 2017 due to the lingering effect from the drought.”

Moving forward, companies covered by UOBKH guided FFB production growth of 8-20% YoY for 2018. Golden Agri Resources (GAR) was the least optimistic about its FFB production growth due to its old tree age profile with declining FFB yield. Meanwhile, BAL expects 15-20% growth, the highest, on the back of FFB yield recovery and supported by the contribution from new mature areas.

“Wilmar and FR expect FFB production growth of 10-12% and 10-15% respectively as the improvement from FFB yield will be partly offset by replanting activity,” he added.

Leow noted that the companies have guided replanting targets for 2018. This is the case “except for BAL which has only 2% of trees at above 18 years old as of December 2016 and these have been replanted in 2017. Replanting activity will dilute FFB yield growth in the next three to four years, but it will ensure sustainable FFB production growth in the longer term.”

Oil extraction rate (OER) is also poised to improve in 2018. Leow said, “The weaker OER in 1H 2017 was due to high rainfall leading to high water content in the fruit and partly affected by lagged impact from the drought. For 2017, most of the companies under our coverage reported flat OER except FR which reported a marginal decline,”

Moreover, potentially higher biodiesel volume could be awarded. “From our channel checks, we gather that the biodiesel volume to be awarded in April 2018 is likely to be higher than in previous contracts. This is partly due to the recent strengthening in crude oil prices and the weakening of CPO prices which narrowed the CPO premium against Brent crude oil, making the biodiesel programme more financially viable,” Leow said.

He added that the increase in biodiesel volume is positive for most of the companies. Moreover, higher CPO production is poised to improve downstream utilisation and profitability this year. “Global palm oil production is expected to increase 5.2% to 70m tonnes. The higher palm oil supply will help maintain refinery utilisation rate. This is positive to the downstream businesses of Wilmar, Golden Agri Resources and FR.”