First Resources - CGS-CIMB Research 2019-03-04: High Inventory A Drag On 4Q18 Earnings


First Resources - High Inventory A Drag On 4Q18 Earnings

  • First Resources’ FY18 core net profit was below expectations due to a net inventory build-up as well as higher-than-expected costs of production in 4Q18.
  • We project higher earnings in FY19, driven by higher CPO prices and output.
  • First Resources remains our top Singapore palm oil pick for upstream exposure due to its young estates (average age of 11 years) and attractive EV/ha (US$11.9k).

Final results below expectations due to higher inventory and costs

  • FIRST RESOURCES LIMITED (SGX:EB5)’s FY18 core net profit fell 18% y-o-y to US$111m due to lower selling prices for palm products, higher costs of production and a net build-up in inventory in 4Q18.
  • We consider the FY18 results, which made up 90%/82% of our/consensus’s full-year forecasts, to be below expectations due mainly to a net inventory build-up and higher-than-expected production costs in 4Q18. Reported FY18 net profit of US$120m was higher than core net profit due mainly to forex gains of US$8.2m.

4Q18 core net profit fell due to higher inventory and lower ASPs

  • First Resources’ 4Q18 core net profit (excluding forex gains) fell 49% y-o-y and 50% q-o-q to US$18m due mainly to weaker plantation EBITDA. Plantation EBITDA fell 36% q-o-q due to lower CPO sales volumes (-13% q-o-q) and ASPs for CPO (-6% q-o-q to US$494 per tonne).
  • On top of this, we gathered the weaker 4Q was also due to a net inventory build-up of 31,000/69,000 tonnes in 4Q18/FY18 and higher-than-expected infrastructure costs incurred by its Kalimantan estates, which were expensed during the year. Its refinery and processing EBITDA grew 46% q-o-q due to higher EBITDA profit/tonne for downstream products (+63% q-o-q to US$26) due to higher utilisation rates and lower feedstock costs.

Stronger FFB output helped cushion lower CPO price

  • Plantation EBITDA, which contributed 97% of First Resources’ total EBITDA, fell 8% y-o-y in FY18 as lower ASPs for palm products coupled with higher costs of production trumped stronger FFB output.
  • ASP achieved for CPO and PK fell by 11% y-o-y and 21% y-o-y to US$540/tonne and US$395/tonne, respectively, while costs of production rose 9% to US$237/tonne. FFB production from its nucleus estates rose 13% y-o-y in FY18 due to a rise in mature areas (+9.6% to 161,759 ha as at 31 Dec 2018) and higher FFB yield (+2.8% to 18 tonnes/ha).

Maintain ADD with higher end-2019 Target Price of S$2.12

  • We finetune our FY19-20F earnings forecasts to reflect the latest results. We project First Resources to report higher earnings in FY19, driven by higher CPO prices and production.
  • First Resources has guided for 5-10% output growth for FY19 and lower costs of production of US$200-220 per tonne (vs. US$237/tonne in FY18). However, we raise our Target Price slightly to S$2.12 (still based on historical average P/E of 15x) to reflect the revised earnings.
  • We continue to rate First Resources an ADD for its attractive valuations (FY19F P/E of 12.5x and EV/ha of US$11.9k).
  • Potential re-rating catalysts/downside risks are higher/lower production and CPO prices.

Ivy NG Lee Fang CFA CGS-CIMB Research | 2019-03-04
SGX Stock Analyst Report ADD MAINTAIN ADD 2.12 UP 2.080