First Resources 2Q19 Results Preview - UOB Kay Hian 2019-08-06: Another Weak Quarter Due To Low ASP

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources 2Q19 Results Preview - Another Weak Quarter Due To Low ASP

FIRST RESOURCES LIMITED (SGX:EB5) is scheduled to release its 2Q19 results on 14 Aug 19. For 2Q19, we are expecting another set of weak quarterly earnings as upstream contributions will be dragged by low selling prices. This is expected to be mitigated by higher sales volume (inventory drawdown) and better contribution from downstream operations.
For 2Q19, First Resources’s FFB production was down 7.4% y-o-y and 1H19’s was down by 8.1% vs guidance of 5% y-o-y growth for 2019.

First Resources is scheduled to announce its 2Q19 results on 15 Aug 19 before market open. For 2Q19, we are expecting a core net profit of around US$13m-15m (vs 1Q19: US$11.7m; 2Q18: US$32.3m). The y-o-y decline is largely due to lower selling prices for CPO (-15% to -17% y-o-y) and palm kernel (PK) (-26% to -38% y-o-y). q-o-q, performance is likely to be slightly better as selling prices for 2Q19 are expected to be better than 1Q19.
Recall that CPO selling prices were better in Mar-May 19. We are still expecting a similar level of sales volume in 2Q19 vs 1Q19.

This could due to the yield stress after strong recovery since 2H17. We have adjusted down our total FFB production growth for 2019 to 3% vs 6% previously. Total FFB production for 2Q19 came in flat q-o-q, but was down 7.4% y-o-y to 731,490 tonnes.
For 1H19, total FFB production was 1.46m tonnes or down 8.1% y-o-y. The largest decline for 1H19 came mainly from plasma, which declined 15.8% y-o-y and contributed about 10% of total FFB production.
For 2019 total FFB production, management has revised down its guidance to 5% y-o-y in May 19 from 5-10% in Feb 19. With this weaker-than-expected 1H19 production, we expect management to revise down guidance further to low single digit. We attribute this weakness to lower production to its older age trees in Riau estates which contributed close to 69% of group production.

Downstream is expected to run at high utilisation rate due to cheaper feedstock price and full take-up of biodiesel allocation in Indonesia. Biodiesel plant (250,000 tonnes p.a.) continues to run at almost full utilisation and 60% of this capacity is taken by local mandate.
If the biodiesel mandate in Indonesia increases to 50% by 2020, local contracted volume will then take up about 90% of First Resources’s biodiesel capacity. Management may consider increasing its biodiesel capacities to cater some capacity for exports market.

Despite an 8.1% y-o-y decline in FFB production, we are still expecting positive production growth for 2019.
Recall that 1H18 saw extremely good production due to recovery from 2015 El Nino impact as well as good rainfall levels in 2016 and 2017. For 2H19, we are expecting stronger production to come from its West Kalimantan estates, which are largely of young prime age.
In our production forecast, we are expecting about 57-58% of 2019 production to come in 2H19, which is similar to its 2017 production.

After taking into consideration its 2Q19 production, we have adjusted down our FFB production expectation to 3% y-o-y from 6% previously. As highlighted earlier, the yield from its older trees in Riau estates could be lower after suffering from the severe drought in 2015.
While the young areas in Kalimantan are performing well, it is still not able to compensate the weakness in Riau given that Riau is contributing about 69% of total production. However, Riau contribution should be declining as oil palm trees in Kalimantan estates are moving into prime age and old trees in Riau are due for replanting.
Post revision, we are expecting a core net profit of US$99.1m (from US$103.5m) for 2019 and maintain net profit forecasts for 2020 and 2021 at US$146.6m and US$163.3m respectively.

We value First Resources based on 2020F PE of 13x (1SD below 5-year average). At mean PE of 16x, First Resources’s fair value would be S$2.00.
We still like First Resources for its good track record of delivering better-than-peers’ performance, and First Resources is also highly leveraged to CPO price. However, at this point, there is no strong catalyst to boost CPO price higher.

First Resources’s earnings are still largely dependent on upstream contribution, and higher CPO price is definitely positive to its earnings. Every 5% increase in CPO ASP would increase First Resources’s net profit by 12-15%.
CPO price has recovered 6.6% from its low on 10 Jul 19. CPO 3-month futures closed at RM2,093/tonne on 5 Aug 19 vs RM1,963 on 10 Jul 19. As per our report dated 29 Jul 19, we expect CPO price to recover and close higher by end-19.
For 1H19, average CPO price was RM1.996/tonne. We are expecting 2H19 average to be within RM2,150-2,250, and then end the year at an average of RM2,100.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-06

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