First Resources - RHB Invest 2019-05-15: Weak Output From Older Estates In Riau


First Resources - Weak Output From Older Estates In Riau

  • Maintain NEUTRAL with lower Target Price of SGD1.53, from SGD1.60, 8% downside, 1% yield, derived from rolled-forward 2020F P/E of 13x, which is in line with its regional peers. Our preferred pick for a Singapore plantation stock is Wilmar International.
  • FIRST RESOURCES LIMITED (SGX:EB5)'s 1QFY19 core net profit was below expectations, comprising 8-12% of our and consensus’ FY19F earnings. The main difference was lower-than-expected FFB output (-7.4% y-o-y) vs our +5.9% projection and management’s +5-10% guidance for FY19; lower CPO (-21.8%) and PK (- 37.4%) prices; as well as lower-than-expected downstream margins.
  • First Resources drew down on an additional 17,000 tonnes of CPO during the quarter (vs 1Q18 buildup of 37,000 tonnes).

First Resources' 1Q19 Briefing Highlights:

  • First Resources' 1Q19 FFB output fell 7.4% y-o-y on weaker output from Riau, due to a change in cropping pattern. Management now targets 5% growth for FY19 (from 5-10% previously), expecting 1H:2H FFB output to be at 40%:60%. We trim our FFB growth forecast to 3.6% for FY19 (from 5.9%).
  • First Resources maintains its cash cost target for FY19 at USD220/tonne (down from USD237/tonne in FY18). Based on our estimates, unit costs rose 17% y-o-y in 1Q19, coming from higher external CPO acquired of 40,000 tonnes.
  • Downstream margin was close to zero in 1Q19 (1Q18: -0.6%), vs our projected 3-5% and management’s previous guidance of stable positive margins of 3-5%. This was due to a 1-2 month time lag in recognising lower feedstock prices, plus a delay in receipt of freight reimbursement charges for some of its biodiesel deliveries.
  • Going forward, management is reluctant to give guidance for downstream margins, given the volatility of CPO prices.
  • First Resources’ biodiesel allocation for 2019 is around 150,000 tonnes, which is based on a B20 mandate. In 1Q19, utilisation was at 90+%, with 65% taken up by local demand, and the rest for export. While First Resources is getting some queries from China for biodiesel supply, it notes that demand from EU has waned in 2Q19, stemming from uncertainty over the results of the ongoing anti-subsidy investigation into Indonesian biodiesel exports into the EU.

We reduce FY19F-21F earnings by 8-14%

  • We reduce First Resources’ FY19F-21F earnings by 8-14%, after taking into account lower (by 10-15%) PK and refined product selling prices, and lower FFB growth.
  • Target Price is lowered to SGD1.53, after rolling forward our valuation period. Our P/E target is unchanged at 13x, in line with First Resources’ historical and peer range of 12- 14x. This implies an EV/ha of USD13,000, in line with its peers’ range of USD10,000-15,000.
  • While we like First Resources for its good age profile and efficient operations, we believe valuations are fair at 14.4x FY20. We maintain our NEUTRAL and our preferred pick for a Singapore plantation stock is WILMAR INTERNATIONAL LIMITED (SGX:F34) (see report: Wilmar International - Positive Surprise Despite Downbeat Guidance).

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-15
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.53 DOWN 1.600