First Resources - RHB Invest 2018-08-15: Biodiesel – Price Catalyst From September?

FIRST RESOURCES LIMITED SGX:EB5

First Resources - Biodiesel – Price Catalyst From September?

Stay NEUTRAL with an unchanged Target Price of SGD1.60, 2% upside.
In 2H18 we expect FFB growth to taper, costs to rise, while downstream profits should improve on higher sales volumes and margins;
The Indonesian Government’s new biodiesel mandate is due for implementation in Sept 2018; this is expected to result in a stronger domestic take up and CPO usage of at least 5m tonnes in 2019 (double that of 2018F). Nevertheless, implementation is key and we prefer to adopt a wait-and-see attitude before changing our forecasts;

FFB growth to moderate in 2H18 after it grew 20.7% y-o-y in 1H18. As weather is relatively normal at most of its estates, it is now guiding for a FFB output growth of 15% for FY18 (from 10-15% previously).
In terms of seasonality of production, it expects 1H/2H output to be at a 45%/55% ratio. We leave our FFB growth forecast intact, at a more conservative 13.4%, for FY18. We estimate unit costs dropped 6% y-o-y in 1H18, on the back of a lower fertiliser application of 50% of total (versus normal levels of 55-60%).
Management expects CPO unit costs to be relatively stable, at USD200- 220/tonne in FY18, in line with that of FY17.

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In 2Q18, First Resources recorded a margin of 3.8% at its downstream division, coming from a turnaround at its refining division and higher margins at its biodiesel division. Its refinery operated at a 90% utilisation rate in 2Q18.
First Resources expects margins to improve in 2H18 on the back of a wider spread between CPO and refined product selling prices as well as higher biodiesel utilisation.

First Resources believes there will be a “top-up” to its current biodiesel tender of 38,000 kilolitres for May-October which will extend the contract period to December. Subsequently, there will likely be a new contract, based on the B30 mandate, for the whole year of 2019.
First Resources believes the implementation will be more effective this time around, given the Government’s promise to stand by the existing penalty of IDR6,000/litre for non- compliance. First Resources is also seeing strong demand from Europe, leading to an 80% utilisation rate in 2Q18 (from 24% in 1Q18). Given these expectations, First Resources estimates CPO prices to trend higher in 4Q18. We are not making any changes to our biodiesel forecasts for now, pending more clarity on the new mandate implementation.
We maintain our forecasts, as we believe 2H18 should see stronger FFB volumes as well as higher downstream margins.

We stay NEUTRAL and make no change to our Target Price of SGD1.60, based on an unchanged 11x 2019F P/E. This implies an EV/ha of USD13,000, in line with its peers’ range of USD10,000-15,000.
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.
Our Top Pick for a Singapore plantation stock is Wilmar (Rating: BUY, Target Price: SGD3.51).

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-15

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