First Resources - UOB Kay Hian 2019-05-09: 1Q19 Results Preview: Another Quarter Hit By Lower ASP

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 1Q19 Results Preview: Another Quarter Hit By Lower ASP

FIRST RESOURCES LIMITED (SGX:EB5) is scheduled to release 1Q19 results on 15 May 19.
We are expecting 1Q19 core net profit of US$10m-12m, lower y-o-y and q-o-q (1Q18: US$25.0m, 4Q18: US$19.9m). Earnings should be dragged down by lower ASPs for all palm products despite higher sales volumes. 1Q usually sees a higher cost of production due to fertiliser application. Expect stronger earnings over the next three quarters.
Maintain HOLD. Target price: S$1.85. Entry price: S$1.65.

FIRST RESOURCES LIMITED (SGX:EB5) is scheduled to release its 1Q19 results on 15 May 19. 1Q19 may not be a good quarter for plantation companies given that palm product prices remain subdued.
We are expecting First Resources to report a 1Q19 core net profit of US$10m to US$12m (vs 1Q18: US$25.0m, 4Q18: US$19.9m). However, a stronger pick-up is expected over the next three quarters with more production coming on stream and an expected recovery in palm product prices. Recall that in 1Q16, core net profit contributed about only 4.2% of full-year earnings.

The dismal earnings for 1Q19 were due mainly to lower ASPs. For Indonesia-based plantation companies, the low selling prices in late-Nov and Dec 18 still had an impact on 1Q19 as a portion of the sales orders committed back then would have been delivered only in 1Q19.
Furthermore, palm prices in 1Q19 did not recover much from 4Q18. Based on the financial reports by Indonesia-listed companies, average CPO price rose 6% q-o-q but dropped 18% y-o-y in 1Q19. Palm kernel prices (about 20% of total palm products) declined significantly by 42% y-o-y and 8% q-o-q.

For 1Q19, total FFB production from nucleus and plasma were lower. The yield recovery from 2015’s El Nino came earlier for the Sumatra region, where FIRST RESOURCES has highest concentration in terms of mature areas. Recall that the El Nino in 2015 hit Sumatra a few months earlier than it affected Kalimantan and it also ended before it did for the rest of the regions in Indonesia.
Oil palm trees in high productive areas in Riau are also reaching an older age and FFB yields will not be able to match that produced during the prime age period (10-15 years). Estates in Riau are undergoing a replanting programme now. In 2018, approximately 1,000ha were replanted.
Also, production from plasma dropped more severely than production from nucleus areas.

We are not expecting a large inventory drawdown in 1Q19 despite the strong inventory build-up at the end of 2018. Sales volumes are likely to be slightly higher than total production recorded in 1Q19.

Higher local allocations and good external demand should lead to full utilisation at FIRST RESOURCES’s biodiesel plant. The biodiesel allocation for 2019 is approximately 79.5% higher y-o-y at 171,854 kilolitres (or 141,186 tonnes).
Also, we believe FIRST RESOURCES’s biodiesel sales to the domestic market also benefitted from demand from the non-mandated segments as diesel prices in Indonesia (Rp9,800/litre) are higher than biodiesel prices (Rp7,348/litre).

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.

Our 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’s fair value would be at S$2.20.

FIRST RESOURCES’s earnings and share price are highly correlated with CPO prices. Thus, CPO price movement is a key driver of its share price. For 2019, we have yet to see any strong catalyst that can push CPO prices beyond RM2,500/tonne (or US$625/tonne).
Our average CPO price assumption for 2019 is maintained at US$587.50/tonne (or RM2,350/tonne).

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-05-09

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.850 SAME 1.850