First Resources - DBS Research 2019-03-04: Top Pick In Our Plantation Universe

FIRST RESOURCES LIMITED (SGX:EB5) | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - Top Pick In Our Plantation Universe

  • First Resources’ 4Q18 earnings in line with our estimate.
  • Trading below its five year average PE multiple.
  • Our top pick in plantation universe for organic growth prospects and solid balance sheet.
  • Maintain BUY with target price of S$1.97.


4Q18 earnings in line with our estimate.

  • FIRST RESOURCES LIMITED (SGX:EB5)'s 4Q18 net earnings reached US$17m (-70% y-o-y, -55% q-o-q), largely in line with consensus and our expectations. 4Q18 performance was driven by lower benchmark prices as the average price (ASP) of CPO and Palm Kernel (PK) reached US$493 per MT (-16% y-o-y, -6% q-o-q) and US$338 per MT (-35% y-o-y, -4% q-o-q) respectively.
  • CPO and PK sales volume were 211k MT (+2% y-o-y, -13% q-o-q) and 44k MT (-10% y-o-y, -14% q-o-q) as production was lower q-o-q as peak crops were achieved in the previous quarter.
  • A final dividend of 2 Scts/share was proposed. Together with the interim dividend of 1.24 Scts/share, the total dividend for the year was 3.25Scts/share. (2017: Final dividend of 2.15 Scts/share; special dividend of 3.40 Scts/share.


Where We Differ: We like FR’s organic growth prospects.

  • We believe First Resources’ young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on maturing trees will improve First Resources’ ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead.
  • First Resources’ aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong volume and earnings growth in FY19F.


Potential Catalyst: Consistent earnings delivery.

  • We believe consistent earnings delivery should move First Resources’ stock price higher. Moreover, a more stable CPO price outlook will mean that First Resources’ earnings growth will be driven by volume and CPO yield expansion.


Key Risks to Our View:

  • CPO output may affect CPO price trend. Stronger-than-expected yields across Indonesia and Malaysia may pressurise CPO price trends next year.


WHAT’S NEW - Top pick in our plantation universe


4Q18 : Earnings affected by lower ASP, in line with our estimate

  • First Resources’ 4Q18 net earnings reached US$17m (- 70% y-o-y, -55% q-o-q), largely in line with consensus and our expectations. The lower earnings was driven by lower average selling prices, amid depressed CPO prices in 4Q18 especially Indonesian prices partly due to the supply chain congestion after the government reignited the biodiesel program besides the high stockpile levels in Malaysia.
  • Revenue of US$145m was lower (-17% y-o-y, -15% q-o-q) largely due to lower benchmark prices as the average selling price (ASP) of CPO and Palm Kernel (PK) reached US$493 per MT (-16% y-o-y, -6% q-o-q) and US$338 per MT (-35% y-o-y, - 4% q-o-q) respectively. CPO and PK sales volume reached 211k MT (+2% y-o-y, -13% q-o-q) and 44k MT (-10% y-o-y, -14% q-o-q) as production was lower q-o-q as peak crop levels were achieved in the previous quarter.
  • We note that there was an inventory build-up of c.69,000 tonnes in 4Q18, which represents c. one month of production volumes due to delivery timing differences. The profit on these inventories is expected to be booked in 1Q19.
  • Total processed fresh fruit bunches (FFB) reached 868k MT (-2% y-o-y, -12% q-o-q), with nucleus fruits output reaching 775k MT (flat y-o-y, -12% q-o-q), with peak production observed in 3Q18.
  • CPO and PK production were 192k MT (-5% y-o-y, -21% q-o-q) and 45k MT (-12% y-o-y, -18% q-o-q) respectively, with CPO yield from trees and extraction yield at 4.6 ton/ha and 22.5% for the full year 2018, production continued to be driven by yield recovery and newly matured estates, with nucleus fruits output reaching 3,062k MT (+14% y-o-y), with management guiding production growth of c. 5-10% for FY2019F.


What to expect in 2019: Cash accumulation ongoing

  • We are keeping our US$148m earnings forecast for 2019 for as we expect CPO ASP to rebound this year, and a moderate increase in fertiliser cost, which would help First Resources to recover its profitability besides tree yield expansion.
  • CPO average selling prices should recover in 1Q19 from 4Q18’s low mainly due to the ongoing Indonesia zero export levies, normalising supply chain in Kalimantan and inventory drawdown from the 4Q18 peak. We expect CPO price to rebound moderately to US$610 per MT (+8% y-o-y) in 2019.
  • Despite the indicative industry forecast that production expansion will be modest in 2019, First Resources has guided for 5%-10% of output growth this year, thanks to maturing young trees and yield expansion – the guidance is higher than its larger and older peers which have mainly guided for flat y-o-y output growth. We expect CPO production to reach 854k MT (+3.7% y-o-y) in 2019 before further growing by 8.4% y-o-y in 2020 to 926.3k MT.
  • In FY2019, First Resources expects to spend c.US$100m capex in total, with the breakdown on ongoing plantation development (15%), infrastructure for plantation management (35%) and building three CPO mills and mill upgrade and maintenance (45%), and others (5%). First Resources’ capex is relatively in line with our total capex assumption in 2019 at US$91m. Beyond 2019, we believe First Resources’ capex will moderate mainly due to the absence of sizable new planting expansion, albeit we expect another 3 new mills (total 21 mills) in next one or two years to cater to the maturing palm oil estates going forward.
  • Despite higher capex outlook y-o-y, dividend is still attractive. A final dividend of 2 Scts/share was proposed in 4Q18 (2017: Final dividend of 2.15 Scts/share, special dividend of 3.40 Scts/share). Capex moderation means more dividends may distributed to shareholders, but in the meantime First Resources aims to strengthen its balance sheet and we are likely to witness a higher dividend payout if First Resources reaches a net cash position.


Rating and target price: Maintain BUY with unchanged Target Price of S$1.97

  • First Resources is trading at 13.6x FY19F PE, which is slightly lower than its Indonesian peers and below its five-year average PE multiple despite stronger organic growth prospects. We believe First Resources has scope for valuation re-rating not only as it sustains its good profitability, but also higher dividend payout prospects in the future.
  • Our Target Price based on Discounted Cash Flow is maintained at S$1.97 per share as we retain our FY19 and FY20 earnings forecast for now. Our target price implies FY19F PE of 15.6x which is at par with its five-year average PE multiple of 16.4x.
  • Maintain BUY.





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-03-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.970 SAME 1.970



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