First Resources - UOB Kay Hian 2018-08-14: 2Q18 Above Expectations On Stronger-than-expected Downstream Operations

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FIRST RESOURCES LIMITED SGX:EB5

First Resources - 2Q18 Above Expectations On Stronger-than-expected Downstream Operations

• First Resources’ 2Q18 results were above our expectation on a better-than-expected downstream performance due to a higher refining margin. The better q-o-q and y-o-y performance in 2Q18 was supported by higher CPO and refined product sales volumes.
• For 1H18, net profit was lower y-o-y on a weaker CPO ASP and inventory build-up. However, we maintain our EPS forecasts as refining margin volatility is high.
• Maintain HOLD and target price of S$1.60. Entry price: S$1.40.

2Q18 RESULTS

Revenue better q-o-q and y-o-y for 2Q18.

• First Resources’ (FR) better q-o-q and y-o-y revenue in 2Q18 was mainly due to higher CPO and refined product sales volumes despite a weaker CPO ASP. The small y-o-y decrease in 1H18 revenue was mainly due to a weaker CPO ASP and a net inventory build-up of about 21,000 tonnes (vs 1H17 inventory drawdown of 47,000 tonnes).
• First Resources’ 2Q18 net profit better q-o-q and y-o-y, in line with the increase in revenue. Excluding forex gains, core net profit was at US$32m (+29% q-o-q, +36% y-o-y) for 2Q18 and US$57m for 1H18 (-18.1% y-o-y). The results were above our expectations. The positive variance was mainly due to better-than-expected downstream operations on a higher-than-expected refinacing margin.

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Plantation and palm mills: Weaker qoq but better yoy in 2Q18.

• This division reported an EBITDA of US$61m (-11% q-o-q, +13% y-o-y). The drop in EBITDA q-o-q was mainly due to weaker CPO and palm kernel (PK) ASPs.
• On the flipside, the better y-o-y performance was mainly due to better sales volumes despite the lower CPO and PK ASPs. For 1H18, EBITDA was flat y-o-y as the higher sales volumes were offset by a weaker CPO ASP.

Refining and processing: Back to black in 2Q18.

• This division reported an EBITDA of US$6.6m in 2Q18 (1Q18: -US$0.7m, 2Q17: US$3.8m), mainly due to better margins and higher refined products sales volume. The better refining margin had First Resources selling more refined products in 2Q18.
• The integrated model gives First Resources the flexibility to capture better margins from upstream or downstream operations. For 1H18, EBITDA was at US$5.9m (-47.1% y-o-y).

STOCK IMPACT

Maintain FFB production growth forecasts for 2018.

• We are expecting FFB production growth of 18% y-o-y for 2018. First Resources reported FFB nucleus production of 702,795 tonnes in 2Q18, which was flat q-o-q, but significantly higher y-o-y. The strong FFB nucleus production y-o-y was supported by a recovery in FFB yields and new mature areas. There will be 16,000ha of new areas coming into maturity in 2018 (10.8% of 2017 mature areas).
• 2Q18 FFB nucleus production accounted for 45% of our full-year estimate. Our FFB production estimate is slightly higher than management’s guidance of 10-15%.

Significant increase in purchased FFB.

• Purchased FFB increased substantially q-o-q and y-o-y in 2Q18 as the purchased FFB was used to maintain the utilisation rate of the new mill which had commenced operations in 2H17. The mill was built to cater to upcoming production at First Resources’ Kalimantan estates.
• Our purchased FFB forecast for 2018 is overly optimistic, with purchased FFB in 1H18 accounting for only 23% of our full-year forecast. Thus, we might need to cut our purchased FFB forecast by 50% should 2H18’s purchased FFB volume be similar to 1H18’s. The cut to our purchased FFB projection will drag down our 2018 net profit forecast by 6%.

EARNINGS REVISION/RISK

Maintain 2018-20 net profit forecasts.

• Despite the 2Q18 results coming in above our expectation, we maintain our 2018 net profit forecasts for now as the good set of results were mainly driven by a better refining margin which is also highly volatile. The strong 2Q18 results have reduced the risk of us downgrading our 2018 net profit forecast.
• We are expecting 2H18’s performance to be stronger than 1H18’s on the back of higher FFB production. We forecast an EPS of 8.7 US cents, 10.1 US cents and 11.3 US cents for 2018- 20 respectively.

VALUATION/RECOMMENDATION

• Maintain HOLD and target price of S$1.60, based on 13x 2018F PE, or -1SD of its 5-year mean PE. 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 First Resources’ earnings.

Leow Huey Chuen UOB Kay Hian Research | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-14

SGX Stock Analyst Report HOLD Maintain HOLD 1.60 Same 1.600