First Resources - UOB Kay Hian 2019-02-20: 4Q18 Results Preview ~ Lower Expectation For 4Q18

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 4Q18 Results Preview: Lower Expectation For 4Q18

First Resources’ 4Q18 FFB production came in below expectations as FFB yield was lower. This could lead to 4Q18 core net profit coming in slightly below our expectation of US$40m- 45m. However, if inventory drawdown was strong in 4Q18, there is still a possibility of First Resources meeting our expectation.
Downstream operation is likely to be better q-o-q on better refining margin and higher biodiesel sales volume.
Maintain HOLD with a new target price of S$1.85. Entry price: S$1.65.

FIRST RESOURCES LIMITED (SGX:EB5) is scheduled to release its 4Q18 results on 28 Feb 19 after trading hours.
Based on the production data announced last week, First Resources’s 4Q18 core net profit could come in 6-8% below our expectation of US$40m-45m. The shortfall is likely due to the lower-than-expected FFB production, ie was 4% below our expectation. We may be too optimistic on its 4Q18 production and underestimated the yield stress after five consecutive quarters of strong recovery and also the dryness in 3Q18.
First Resources’ 4Q18 FFB production was lower q-o-q and y-o-y at 868,941 tonnes. The FFB production in 2018 was 3.4m tonnes, lower than our full-year estimation by 4%. We have taken into consideration some inventory drawdown in 4Q18.

FFB yield in 4Q18 came in below our expectations. We may have been too optimistic on production, and only factor in just a slight yield decline in 4Q18. Lower FFB yield in 4Q18 came after five consecutive quarters of good yield recovery post 2015 El Nino.
FFB production in 2018 was 3.4m tonnes, up 13.1% y-o-y, and FFB production from nucleus areas was up 14.1% y-o-y. For 2019, FFB production is expected to hover around 3.8m tonnes with better yield coming from its larger young mature areas.

CPO production reported a decline of 20.7% q-o-q and 5.3% y-o-y, and declined more than FFB for 4Q18 due mainly lower oil extraction rate (OER) at 22.5% (- 2.2% q-o-q; 1.8% y-o-y) and lower external party FFB purchased. Higher production from its nucleus and plasma areas coupled with slower sales resulted in lower third-party FFB purchased.
Our CPO production forecast for 2018 was slightly higher, with full-year CPO production accounting for just 84% of our full-year estimate.

We are expecting a higher inventory drawdown in 4Q18 with the lower production and high built-up inventory in 3Q18. The lower q-o-q production could possibly be mitigated by higher sales volumes q-o-q.

With the Indonesia’s government expanding the B20 biodiesel blending mandate to the non-PSO (public service obligations) segment, First Resources was given an additional 23,081kl to supply to Pertamina under the non-PSO segment for Sep-Dec 18, or about 26% of its total allocation under the PSO segment (87,518kl for 2018). This may translate to a higher performance from downstream with a higher refinery margin and biodiesel blending volume.

We maintain our EPS forecasts of 8.7 US cents, 10.1 US cents and 11.3 US cents for 2018-20 respectively.

Maintain HOLD with a new target price of S$1.85 as we roll valuation to 2019. Our target price is based on 13x 2019F PE, or -1SD of its 5-year mean PE. Entry price is S$1.65.

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.

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-20

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.85 UP 1.600