First Resources - UOB Kay Hian 2019-03-12: Need Better CPO Prices To Push Performance

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - Need Better CPO Prices To Push Performance

First Resources (SGX:EB5)’s 4Q18 earnings were below expectation because of the build-up of inventory (about one month’s production) due to timing of delivery. These volumes were delivered in Jan 19 and booked in 1Q19’s earnings.
Overall, 2019 would be a good year for First Resources with support from higher production (2019F: +8.1% y-o-y) and better selling prices. Biodiesel plant is expected to run at full capacity but contribution is still relatively small.
Maintain HOLD. Target price: S$1.85. Entry price: S$1.65.

Two factors that led to the delayed of shipments were:
1. sellers holding back delivery while waiting for the official announcement of the change of export levy to US$0/tonne from US$50/tonne for CPO. By the time the announcement was made on 4 Dec 18, the waiting queue to ship palm oil had built up and hence it took some time to clear deliveries, and
2. Change of the biodiesel delivery ports to Balikpapan, Kalimantan from Sumatra, which requires a longer shipping time. As these shipments were still in transit on 31 Dec 18, these biodiesel sales were not booked.

4Q18 was a difficult quarter with selling prices suddenly plunging in late-3Q18 and hitting bottom in early-Dec 18. This resulted in CPO exports levy being changed at US$0/tonne from US$50/tonne to ease the pricing pressure, especially for local farmers. CPO selling prices dropped to as low as US$411/tonne, while local net price was just US$414/tonne. However, prices have since recovered.
Indonesia CPO traded at US$510/tonne (fob price) on 7 Mar 19. This should support plantation earnings from 2Q19 onwards. 1Q19 should still see lower selling prices for Indonesia-based producers because of the delay in shipment for sales committed in Dec 19.

FFB production growth is guided to be within the range of 5-10% (2018 guidance was 10-15% vs reported 13.8% y-o-y). We are expecting 8.1% y-o-y growth for 2019 which is within management’s guidance. The slower production is due to:
1. higher base, and
2. FFB yields for older trees at its Riau areas are unlikely to recover back to its peak before 2015 El Nino.
First Resources’ oil palm estates have an older age profile and have started undergoing replanting process. In 2018, First Resources replanted 800 ha with another 1,500 ha to be replanted in 2019. Younger trees are located in East and Central Kalimantan, which now contribute about 26% of total FFB production.

First Resources’ biodiesel plant is expecting to run at full capacity in 2019 and FR has no plan to expand its biodiesel facility. The biodiesel allocation under the Indonesia biodiesel mandate has been increased by about 80% y-o-y for 2019 (which will fully utilise its current capacity). For the sales of biodiesel, First Resources will focus on meeting the delivery requirement in order to fulfil the contracted volume under the biodiesel mandate.
Failure to meet the delivery would lead to a penalty of Rp6,000/kg and this has been imposed since 4Q18.

First Resources is guiding for higher capex of US$100m for 2019 (vs the past of about US$90m). The capex is for new plantings and maintenance of immature areas, infrastructure for newly-planted areas, building three CPO mills as well as mill upgrades and maintenance.
Capex post 2021 could moderate due to the absence of sizeable new planting expansion. Based on the total plantable areas and its new planting progress, First Resources expects to build another three new mills (total: 21 mills) to cater to the maturing palm oil estates. Capex moderation means more dividends could be distributed to shareholders.

We maintain our EPS forecasts of 10.3 US cents, 11.4 US cents and 12.9 US cents for 2019, 2020 and 2021 respectively.

Target price of S$1.85 is based on 13x 2019F PE, or -1SD of its 5-year mean PE. Entry price is S$1.65. If we peg the valuation to mean PE of 15x, First Resources’ fair value would be S$2.20.

First Resources' earnings and share price are highly correlated to CPO prices. Thus, CPO price movement is the key driver to First Resources share price.
For 2019, we have yet to see any strong catalyst that can push CPO beyond RM2,500/tonne (or US$625/tonne). Our average CPO price assumption for 2019 is S$587.50/tonne (or RM2,350/tonne).

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-03-12

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.850 SAME 1.850