First Resources - DBS Research 2019-05-15: Coming Off Last Year’s High Base

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

First Resources - Coming Off Last Year’s High Base

  • First Resources's !Q19 Earnings dropped from last year’s high base.
  • Lower output trend y-o-y, a sign of unfavourable weather.
  • Soft 2019 earnings performance appears to have been priced in.
  • Maintain BUY with a lower Target Price of S$1.95.



Coming off last year’s high base.

  • Net profit reached US$12.3m (-56% y-o-y, -38% q-o-q), below expectation mainly on lower-than-expected output which was previously expected to cushion earnings amid low ASP. The weaker earnings and output performance were due to last year’s high base.
  • We cut our FY19F/20F earnings forecasts by 13%/9% to US$128m (+7% y-o-y) and US$157m (+22% y-o-y) respectively, mainly on lower ASP assumption.


1Q19 earnings performance: Coming off last year’s high base.

  • FIRST RESOURCES LIMITED (SGX:EB5)'s 1Q19 net profit reached US$12.3m (-56% y-o-y, -38% q-o-q), below expectation mainly on lower-than-expected output which was previously expected to cushion earnings amid low ASP. Overall profitability performance was consequently lower y-o-y but net profit margin still managed to grow at double digits despite the soft top-line performance.
  • FFB production reached 724,000 MT (-9% y-o-y, -17% q-o-q), comprising own FFB and smallholders of 654,000 MT (- 7% y-o-y, -16% q-o-q) and 70,100 MT (-20% y-o-y, -25% q-o-q) respectively. The lower production y-o-y was caused by last year’s higher base, as First Resources booked stellar output performance last year.
  • Consequently, First Resources also posted a similar trend on CPO and PK production which reached 174,900 MT (-9% y-o-y, -9% q-o-q) and 40,600 MT (-9% y-o-y, -10% q-o-q) respectively, albeit sales volume performance which was buffered by stockpile drawdown. CPO and PK sales volume reached 184,800 MT (+2% y-o-y, -13% q-o-q) and 44,500 MT (-5% y-o-y, -1% q-o-q) respectively.
  • CPO and PK ASP reached US$460 per MT (-22% y-o-y, -7% q-o-q) and US$329 per MT (-37% y-o-y, -3% q-o-q) respectively, trailing the high-base benchmark trend from last year, especially before the trade war erupted in 1Q18.


Earnings revision: Cutting earnings post soft 1Q19 results

  • The weaker earnings and output performance were due to last year’s high base. We cut our FY19F/20F earnings forecasts by 13%/9% to US$128m and US$157m respectively, mainly on lower ASP assumptions. Our earnings forecasts remain below the consensus as we input more conservative profitability outlook among our upstream CPO planters.
  • Our ASP assumption put a wider discount to our benchmark price of 20% and 9% in 2019 and 2020 respectively mainly to account for the weak realised CPO ASP in 1Q19. Earnings forecasts are sensitive to CPO price movements as every 1% change in CPO price would result in a 5% change in our earnings forecast.


Rating and target price.

  • We believe the negatives have been baked into the price.
  • First Resources’s share price corrected recently before its earnings results were released and this prompted us to keep our BUY rating as we believe the market has priced in the soft 1Q19 earnings performance.
  • Our target price is reduced to S$1.90 mainly on lower FY19F and FY20F earnings although we remain optimistic on its longer-term earnings prospects.
  • Our target price implies FY19 PE of 16.5x which we believe is undemanding for companies that can withstand the current low price environment.


Where We Differ: We like First Resources’s organic growth prospects.

  • We believe First Resources’s young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on maturing trees will improve First Resources’s ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead.
  • First Resources’s 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: Earnings improvement.

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


Valuation:

  • We employed DCF methodology (FY19F as base year; WACC 11.8%; TG 3%) to arrive at a fair value of S$1.95/ share.
  • Maintain BUY.


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.





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-05-15
SGX Stock Analyst Report BUY MAINTAIN BUY 1.95 DOWN 1.970



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