First Resources - Maybank Kim Eng 2018-08-14: No Surprises To 2Q18 Results

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FIRST RESOURCES LIMITED SGX:EB5

First Resources - No Surprises To 2Q18 Results

Room for stronger 2H18 earnings

• First Resources' 2Q18 core PATMI met 26%/25% of our/consensus full-year estimates – inline. We are keeping our forecasts, anticipating better 2H18 earnings.
• Maintain BUY and unchanged Target Price of SGD2.00 on 17x FY18 PER, pegged at its 5-year historical mean. We continue to like First Resources for its medium-term growth prospect and cost efficiency, being one of the lowest cost producers in the region.
• First Resources declared an interim DPS of 1.25sen.

Upstream & downstream posted stronger earnings

• First Resources' 2Q18 core PATMI of USD36m (+55% y-o-y, +30% q-o-q) was lifted in part by the net inventory drawdown of 16,000 MT (following net inventory build- up of ~37,000 MT in 1Q18). Had it not for the higher effective tax rate of 33% due to withholding taxes on income received from foreign subsidiaries, its 2Q18 core results would have been even better.
• Operationally, its higher 2Q output (+29% y-o-y, -1% q-o-q) more than offset lower CPO ASP (-9% y-o-y, -4% q-o-q). As for downstream division, it recorded good EBITDA margins of USD24/t (2Q17: +USD20/t, 1Q18: - USD4/t) which we believe was in part due to pick up in biodiesel order.

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Keeping our FFB nucleus growth forecast of 13%

• FFB nucleus output grew sharply higher in 2Q18 to 0.7m MT (+29% y-o-y, - 1% q-o-q), bringing 1H18 FFB nucleus output to 1.41m MT (+21% y-o-y) which met 46% of our full-year forecasts. While it is higher than the historical 1H:2H 42:58 output trend, we are keeping our 2018 FFB nucleus output growth forecast of +13% y-o-y pending fresh growth guidance from First Resources (previously +10-15% y-o-y).
• We believe 2H18’s output growth will taper somewhat given the relatively higher base of 2H17.

Expect better 2H18 results, aided by stocks-in-hand

• First Resources' 1H18 core PATMI of USD64m (-11% y-o-y) met 46% of our full-year forecasts. Overall 1H18 results were somewhat affected by a net inventory build-up of ~21,000 MT (1H17: drawdown of ~47,000 MT). The higher stockpile may be released in 2H18 to deliver higher profits.
• Coupled with seasonally higher output in 2H18 to offset lower CPO ASP, our earnings forecasts are kept unchanged for now. We have imputed USD570/t net CPO ASP in FY18E (1H18: USD576/t).

Risk statement

• There are several risk factors for our earnings estimates, price target, and rating for First Resources (FR). Key risks to the palm oil sector and FR are:
  1. weather anomalies resulting in poorer-than-expected output growth,
  2. lower-than- expected CPO price achieved,
  3. negative policies imposed by import countries,
  4. unfriendly policies imposed by the Indonesian government on upstream or downstream segments,
  5. sharply lower crude oil prices which makes palm biodiesel demand not viable, and
  6. weaker competing oil prices (like soybean and rapeseed).

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-08-14

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