First Resources - CGS-CIMB Research 2019-05-15: Low Production & Palm Prices Hit 1Q19


First Resources - Low Production & Palm Prices Hit 1Q19

  • FIRST RESOURCES LIMITED (SGX:EB5)'s 1Q19 core net profit was below expectations due to lower-than-expected FFB output and downstream margin.
  • We lower our earnings forecasts to reflect lower PK prices and FFB yield. We project First Resources to post better earnings in 2H19 on the back of higher output.
  • Despite earnings setbacks, First Resources remains one of our top picks due to its young estates (average age of 12 years) and attractive EV/ha (US$11.7k).

1Q19 below expectations due to lower output and refining margin

  • FIRST RESOURCES LIMITED (SGX:EB5)’s 1Q19 core net profit fell 54% y-o-y to US$11.7m due to lower selling prices for palm products, higher costs of production and weak downstream margin.
  • We consider the 1Q19 results, which made up 8% of our/consensus full-year forecasts, to be below expectations mainly due to lower-than-expected ASPs for palm kernel, delay in reimbursement for biodiesel transport costs and lower refining margin.
  • Reported FY18 net profit was higher mainly due to forex gains.

Lower plantation profit led to lower 1Q19 profit

  • First Resources’ 1Q19 core net profit (excluding forex gains) fell 54% y-o-y and 39% q-o-q to US$12m, mainly due to weaker plantation EBITDA.
  • Plantation EBITDA fell 53% y-o-y as marginally higher CPO sales volumes (+2% y-o-y) were insufficient to offset lower ASPs for CPO (- 22% y-o-y to US$460 per tonne). On top of this, we gather that the weaker 1Q was also due to higher fertiliser (+8-9%) and labour costs (+8%). Its refinery and processing segment posted a slight negative EBITDA despite posting a 46% jump in processing sales volumes.
  • We gather that this was due to the suspension of CPO export levy in Indonesia which affected refiners’ margins as well as the delay in the reimbursement of transport costs for biodiesel sales.

Key takeaways from teleconference call

  • First Resources revealed that the 7% decline in FFB output from its nucleus estates was below its expectation of 5-10% FFB output growth guidance for the full year. In view of this, it has lowered its FFB output guidance to 5%.
  • First Resources now expects a recovery in FFB output only in 2H19. It cited a shift in crop patterns as a possible reason for the weak 1Q19 production.

Maintain Add with a lower end-2019 Target Price of S$1.99

  • We cut our FY19-21F EPS forecasts by 6-23% to reflect lower FFB yields, ASP for PK, higher estates costs and lower refining margin. We project First Resources to report higher earnings in 2H19, driven by higher CPO prices and production. First Resources has guided for costs of production of US$220 per tonne (vs. US$237/tonne in FY18).
  • We cut our Target Price slightly to S$1.99 (still based on historical average P/E of 15x) to reflect the revised earnings estimates.
  • We continue to rate First Resources an ADD for its attractive valuations (FY20F P/E of 12.4x and EV/ha of US$11.7k).
  • Potential re-rating catalysts/downside risks are higher/lower production and CPO prices.

Ivy NG Lee Fang CFA CGS-CIMB Research | 2019-05-15
SGX Stock Analyst Report ADD MAINTAIN ADD 1.99 DOWN 2.120