First Resources - RHB Invest 2018-05-16: Hoping For More Biodiesel Demand

First Resources - RHB Invest 2018-05-16: Hoping For More Biodiesel Demand FIRST RESOURCES LIMITED SGX: EB5

First Resources - Hoping For More Biodiesel Demand

  • Maintain NEUTRAL, with a lower Target Price of SGD1.60, (from SGD1.75) based on an unchanged 12x 2018F P/E, while offering a 1% downside.
  • While First Resources' management remains optimistic on FFB output growth and improving margin outlook for its downstream division, we are a bit more conservative, reducing our margin assumptions instead.
  • Biodiesel demand remains the biggest potential catalyst for the sector at the moment, and is dependent on a larger take-up from the Indonesian Government as well as export markets. This has, however, not happened as yet.

FFB output to see a seasonal bump in 2H18.

  • First Resources reported FFB output growth of 13% in 1Q18. As the weather is relatively normal at most of its estates, it continues to guide for FFB output growth of 10-15% for FY18. 
  • In terms of seasonality of production, it expects 1H:2H output to be at a 40%:60% ratio. We therefore leave our FFB growth forecast intact, at 13.4%, for FY18. This is on the back of 15,000ha of new areas coming into maturity.

Inventory build-up – a matter of timing

  • It expects to be able to recognise the profit from the sale of its 37,000 tonnes of inventory build-up in 2Q18.

We estimate that unit costs dropped by 2% y-o-y in 1Q18.

  • Management expects CPO unit costs to be relatively stable, at USD200-220/tonne in FY18, in line with that of FY17.

Downstream division margins should improve.

  • In 1Q18, First Resources recorded a margin of -0.6% at its downstream division, stemmed from losses recorded at its refining division and lower margins realised at its biodiesel division, from lower selling prices. Its refinery operated at a 86% utilisation rate in 1Q18. 
  • Going forward, management expects margins to improve on the back of a wider spread between CPO and refined product selling prices as well as improved utilisation at its biodiesel plant. 
  • Nevertheless, we reduce our refining margins to 1-2% (from 3-4%) for FY18-20.

Pertamina biodiesel allocation of 38,000 kilolitres for May-October,

  • .., which is slightly higher than its Nov 2017-May 2018 allocation of 35,000 kilolitres. Based on this allocation, the company would only be running its biodiesel plant at a 24% utilisation. 
  • However, ever since the anti-dumping duties on biodiesel in Europe have been lifted, it is seeing improvements in demand from the export market, and hopes to raise its utilisation rate to close to 100%, particularly as crude oil prices have now risen. 
  • As we keen towards being a bit more conservative, we reduce our biodiesel utilisation to 30-40% (from 40-50%).

All in, we are reducing our forecasts by 4-9% for FY18-20.

  • We have also imputed in higher effective tax rates for FY18, coming from an additional withholding tax of c.USD6m, to be recognised in 2Q18.

Maintain NEUTRAL.

  • Post earnings revision, we lower our Target Price to SGD1.60, based on an unchanged 12x 2018F P/E. This implies an EV/ha of USD13,000, in line with that of its peers’ range of USD10,000-15,000/ha. 
  • First Resources’ extensive exposure to Riau (67%) puts it at risk, in the face of weak weather-led productivity, while valuations look fair at current levels.

Singapore Research RHB Invest | 2018-05-16
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.60 Down 1.75