First Resources - DBS Research 2018-08-15: Output Buffered Earnings Performance

First Resources - DBS Group Research 2018-08-15: Output Buffered Earnings performance FIRST RESOURCES LIMITED SGX:EB5

First Resources - Output Buffered Earnings performance

  • First Resources’ 2Q18 earnings ahead of our expectations.
  • Strong output buffered earnings.
  • Entering prime age cycle – earnings growth catalyst.
  • Maintain BUY with Target Price of S$2.00.

Earnings ahead of our expectations, strong output buffered 2Q18 performance.

  • First Resources (FR) booked 2Q18 earnings of US$35.9m (+55% y-o-y, +30% q-o-q) – slightly ahead of our expectations. 
  • The strong growth was led by 29%/39% growth in CPO and PK sales volumes respectively, partially impacted by a net inventory build-up of ~21,000 tonnes in 6M2018 (6M2017: drawdown of ~47,000 tonnes). We expect this to be recognised subsequently in 3Q18. 

~ ~ Where SG investors share

Where we differ:

We like FR’s organic growth prospects.

  • We believe First Resources’ young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on upcoming maturing trees will improve First Resources’ ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead. 
  • First Resources’ aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong volume and earnings growth in FY18F.

Potential catalyst:

  • Consistent earnings delivery. We believe consistent earnings delivery should move First Resources’ stock price higher. Moreover, stabilising CPO price outlook will mean that First Resources’ earnings growth will be driven by volume and CPO yield expansion. 


  • We employed DCF methodology (FY19F as base year; WACC 11.8%; TG 3%) to arrive at a slightly lower fair value of S$2.00/ share after imputing our earnings forecast adjustments. 

Key Risks to Our View: 

  • CPO output may affect CPO price trend. Stronger-than-expected yields across Indonesia and Malaysia may pressurise CPO price trends next year. 


  • Output buffered earnings performance

2Q18 earnings: Slightly ahead of our expectations

  • First Resources (FR) booked 2Q18 earnings of US$35.9m (+55% y-o-y, +30% q-o-q) – slightly ahead of our expectations. The strong earnings growth was led by solid top-line performance of US$181m (+34.5% y-o-y,+33.5% q-o-q) which was led by CPO and PK sales volume growth of 29% y-o-y /38% y-o-y respectively, partially impacted by a net inventory build-up of ~21,000 tonnes in 6M2018 (6M2017: drawdown of ~47,000 tonnes).
  • We expect this to be recognised subsequently in 3Q18. Meanwhile, on the other hand, CPO and PK ASP reached US$565 per MT (-9% y-o-y, -4% q-o-q) and US$365 per MT (-13% y-o-y, -31% q- o-q) respectively, due to the weakening trend over global CPO price benchmark.
  • First Resources’ 2Q18 EBITDA for both Plantations and Refining & Processing showed sequential improvements, with EBITDA margin for Plantations easing slightly to 48.7% (1Q18: 52.0%, 2Q17: 50.6%) on lower implied CPO ASP. Refining & Processing EBITDA margins recovered from negative territories the previous quarter. 
  • Overall, gross profit came in at US$78.6m (+37% y-o-y, +24% q-o-q) offset by higher selling and distribution costs. Operating profit margins at 31.2% were largely unchanged y-o-y (1Q18: 32.0%).

FFB yields continue to recover

  • First Resources’ own fresh fruit bunch (FFB) output and smallholders FFB for the quarter were largely unchanged q-o-q at c.700,000 MT and c.87,000 MT respectively, representing 29% and 23% growth from 2Q17’s output which saw delayed impact from El Nino. 
  • FFB Yield continued to recover to 4.1 MT/ha (2Q17: 3.6 MT/ha), though still behind 2Q15’s 4.6 MT/ha.

Outlook :

Entering prime age cycle

  • Despite the stronger-than-expected set of numbers in 2Q18, we prefer to keep our forecast for now, anticipating the still weak CPO and PK prices in 3Q18.
  • We believe First Resources’ strong output should cushion the effect on low CPO and PK prices in 2H18. We expect output growth to continue into 2H18 due to continued FFB yield improvement with new mature hectarage coming in and maintain our forecast of c.3m MT FFB for the full year.
  • Beyond the seasonal yield recovery in the second semester this year, First Resources’ average tree age was only at 11 years, and is set to enter its prime age production phase in the next five years. 
  • Going forward, we see First Resources as one of the best plays to capitalise on the tightening supply and demand outlook given its potential to grow its output to gain from steady long-term CPO prices.


  • Maintain BUY, Target Price S$2.00. We employed DCF methodology to value First Resources. Based on our current forecast, First Resources’ fair value is estimated at S$2.00 (WACC 12%; TG 3%).
  • We believe First Resources’ valuation is undemanding, considering its organic CPO output prospects which enable the company to maximise margin per ton in various CPO price cycles.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | 2018-08-15
SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000