FIRST RESOURCES LIMITED
SGX: EB5
First Resources - 1Q18 Results Preview: Expect Weaker Q-o-q And Y-o-y Performance
- First Resources’1Q18 nucleus FFB production came in within expectations. FFB production was weaker q-o-q due to seasonality but stronger y-o-y on yield recovery and new mature areas. We forecast core net profit of US$29m-32m for 1Q18, down q-o-q and y-o-y.
- Maintain HOLD but reduce target price to S$1.60 as we ascribe a lower 2018F PE of 13x on weak earnings expectations due to expected weaker CPO ASP.
- Entry price: S$1.40.
WHAT’S NEW
1Q18 production statistics came in within our expectations.
- We forecast core net profit of US$29m-32m for 1Q18 (4Q17: US$35m, 1Q17: US$46m). We expect a weaker q-o-q performance due to weaker FFB production (as 1Q is a low production period) and weaker CPO ASP.
- Meanwhile, y-o-y earnings could also come in weaker as the better y-o-y production would be offset by substantially lower CPO ASP.
- First Resources targets to release 1Q18 results on 14 May after market close.
STOCK IMPACT
- 1Q18 FFB nucleus production weaker q-o-q but higher y-o-y. First Resources reported FFB nucleus production of 706,637 tonnes in 1Q18, which was its strongest 1Q production, supported by a recovery in FFB yields and new mature areas. There are 16,000ha of new areas coming into maturity in 2018 (10.8% of 2017 mature areas). 1Q18 FFB nucleus production accounted for 22% of our full-year estimate (1Q10-1Q17: 18.6-22.0% of full- year production). We are expecting FFB production growth of 18% y-o-y for 2018, slightly higher than management’s guidance of 10-15%.
- Significant increase in FFB purchased. FFB purchased increased substantially q-o-q and y-o-y in 1Q18 as the FFB purchased was to maintain utilisation rate of the new mill which was commercialised in 2H17. The mill was built ahead to cater for upcoming production at its Kalimantan estates.
- Lower q-o-q but higher y-o-y CPO production, in line with FFB production trend. CPO production decreased 5.5% q-o-q but rose 19.2% y-o-y in 1Q18. The y-o-y increase was higher than FFB production rise of 12.4% y-o-y mainly due to a better oil extraction rate (OER) of 22.9% in 1Q18 (1Q17: 22.4%) and higher FFB purchased.
- OER to recover in 2018. In line with industry trend, OER was lower at 22.2% in 2017 (2016: 22.5%) due partly to the lagged impact from the 2015 El Nino. In 1Q18, OER was 22.9% (1Q17: 22.4%). OER is expected to recover to at least 2016’s level. We are expecting OER of 22.8% for 2018 (2016: 22.5%, 2017: 22.2%).
- Lower CPO ASP could drag earnings. Dumai/Belawan CPO ASP was weaker q-o-q and y-o-y in 1Q18 (-2.8% q-o-q, -12.7% y-o-y) due to expected CPO production pick-up in 2H18.
- Downstream operations could be weaker qoq and yoy in 1Q18. We expect weaker q-o-q and y-o-y refining earnings in 1Q18. Refining volume is expected to be weaker q-o-q, but higher y-o-y on the back of more feedstock available in the market. Meanwhile, refining margin is expected to be weaker y-o-y on lower biodiesel margins. However, there could be some upside surprise in pure refining margins as Indonesia refiners gained market share at the expense of Malaysian refiners as Malaysian refiners were struggling to secure CPO in 1Q18.
- Higher biodiesel allocation. In the sixth biodiesel announcement (for the period May 18- Oct 18), the allocations for First Resources was 38,049 kiloliters (kl), which is 9.4% higher hoh, while flat y-o-y. We are expecting biodiesel will continue to contribute positively to First Resources’ earnings.
EARNINGS REVISION/RISK
- No change to our earnings estimates. We forecast EPS of 8.7 US cents, 10.1 US cents and 11.3 US cents for 2018-20 respectively.
VALUATION/RECOMMENDATION
- Maintain HOLD with a lower target price of S$1.60 (from S$1.95) as we adjust our ascribed 2018F PE to 13x from 16x, or from its 5-year mean PE to -1SD of 5-year mean. The lower PE multiple is due to the weak CPO price outlook that will lead to weak earnings in 2018. We are expecting EPS to decline 2% y-o-y for 2018.
- Despite First Resources' share price having declined from a high of S$1.92 on 29 Jan 18 to S$1.70 now, we reckon this is still not a good time to enter due to potential further downside in share price in view of weak earnings outlook. Entry price is S$1.40.
SHARE PRICE CATALYST
- Better-than-expected CPO prices. First Resources’ earnings are still largely driven by upstream operations and this makes its earnings highly sensitive to CPO prices. Any increase in CPO selling prices from our base case of RM2,400/tonne would be positive to earnings.
- Stronger-than-expected FFB production. Stronger-than-expected production recovery will contribute to First Resources’ earnings.
Leow Huey Chuen
UOB Kay Hian
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Ooi Mong Huey
UOB Kay Hian
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https://research.uobkayhian.com/
2018-05-07
SGX Stock
Analyst Report
1.60
Down
1.950
