First Resources Ltd - CGS-CIMB Research 2018-08-13: Higher Sales Volumes Trump Lower CPO Prices In 2Q

First Resources Ltd - CGS-CIMB Research 2018-08-13: Higher Sales Volumes Trump Lower Cpo Prices In 2q FIRST RESOURCES LIMITED SGX:EB5

First Resources Ltd - Higher Sales Volumes Trump Lower CPO Prices In 2Q

  • First Resources’ 1H18 core net profit was broadly in line with expectations, making up 41% of our full-year forecast and 39% of the Bloomberg consensus number
  • 2Q18 earnings were driven by higher CPO sales volumes which more than offset the lower ASPs for palm products.
  • Its downstream division also posted strong earnings due to higher biodiesel and refining margins.
  • We project stronger earnings in 2H18 on the back of higher output and improved downstream margins.
  • Maintain ADD with an unchanged target price of S$2.03 (15x CY19F P/E).

1H18 results in line with expectations

  • First Resources’s (FR) 1H18 core net profit of US$57m accounted for 41% of our full- year forecast and 39% of the Bloomberg consensus number. We consider the results to be broadly in line with our and consensus projections, as we expect sales volumes and processing margins to improve in subsequent quarters. Reported net profit of US$64m was higher than core net profit due mainly to forex gains.
  • First Resources also declared an interim dividend of S$0.0125 per share, which represents a 23% payout ratio.

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Strong sales volumes offset lower ASP leading to better 2Q18

  • First Resources’ 2Q18 core net profit (excluding forex gains and Fair Value losses of biological assets) grew 35% y-o-y to US$32m due to higher plantation and downstream earnings.
  • The stronger plantation earnings were due to higher CPO sales volumes (+28.9% y-o-y) which more than offset the lower ASPs for CPO and PK. The higher sales volume was partially due to net inventory draw down of 16k tonnes in 2Q18. Its refinery and processing division reported a 74% jump in 2Q18 EBITDA due to higher processing volumes and margins.

FFB output grew 29.4% due to improved yields and new areas

  • Plantation EBITDA grew 13.3%/0.2% y-o-y in 2Q18/1H18, as higher sales volumes trumped lower ASPs for palm products. ASP achieved for CPO and PK fell by 9% and 12% y-o-y to US$565 per tonne and US$366 per tonne in 2Q18, respectively, in line with the lower prices in international markets.
  • FFB production from its nucleus estates rose 29% y-o-y in 2Q18, representing a new record high output for First Resources in 2Q, due to a rise in mature areas and higher FFB yield. The group’s new mature area grew by 13k ha y-o-y in 2Q18.

Net inventory situation in 1H18

  • CPO sales volumes grew 19.1% y-o-y to 373,339 tonnes in 1H18, lower than the group’s CPO output of 195,865 tonnes for the same period. This was due partly to the effects of a net inventory build-up of 21,000 tonnes of palm products in 6M18 (6M17: drawdown of 47,000 tonnes).

Expect strong output growth to extend into 2H18

  • First Resources revealed that it expects output growth to extend into 2H18 due to continued improvements in FFB yields, contribution from new mature areas and seasonal production upswings.
  • First Resources also highlighted that the positive spread between gasoil and palm oil prices, together with the push for higher biodiesel blend by the Indonesia government is expected to be supportive for biodiesel demand.

Maintain ADD with unchanged Target Price of S$2.03

  • We project stronger earnings in 2H18 driven by higher production and downstream processing margins. We are keeping to our ADD call and target price (which is based on historical average P/E of 15x) as we are positive on First Resources’ future earnings prospects due to its young age profile (weighted average age of 11 years).
  • Potential re-rating catalysts are better-than-expected production and earnings.
  • Key risks are lower CPO prices and production.

Ivy NG Lee Fang CFA CGS-CIMB Research | 2018-08-13
SGX Stock Analyst Report ADD Maintain ADD 2.030 Same 2.030