First Resources - CGS-CIMB Research 2019-08-15: Higher Output & Price To Drive 2H Earnings


First Resources - Higher Output & Price To Drive 2H Earnings

  • First Resources's 1H19 core net profit was below expectations due to lower-than-expected FFB output as well as CPO prices.
  • FY19-21F EPS cut by 19-35% reflect lower palm product prices and FFB yield. We see a stronger 2H19F on higher output and CPO price recovery.
  • We cut our Target Price to S$1.76 but retain First Resources as one of our top picks due to its young estates and attractive EV/ha (US$11k).

1H19 below expectations due to lower output and CPO price

  • FIRST RESOURCES LIMITED (SGX:EB5)’s 2Q19/1H19 core net profit fell 46%/49% y-o-y to US$17.3m/ US$29m due to lower selling prices for its palm products, weaker-than-expected production, and lower downstream margin.
  • We consider First Resources's 1H19 core net profit, which made up 26% and 24% of our and Bloomberg consensus’ full-year forecasts, to be below expectations, mainly due to lower-than-expected ASPs for CPO and the unexpected 7% y-o-y decline in FFB output from its nucleus estates in 1H19.

Estates and downstream businesses posted lower earnings in 1H

  • First Resources’s 1H19 core net profit (excluding forex gains) fell 49% y-o-y to US$29m, mainly due to weaker plantation EBITDA. 1H19 plantation EBITDA fell 48% y-o-y due to lower CPO sales volumes (-1.3% y-o-y) and lower ASP for CPO (-17% y-o-y to US$476 per tonne). On top of this, we gather the group has applied approx. 60% of its FY19 fertiliser requirements in 1H19. Its refinery and processing segment posted a 48% decline in EBITDA due to lower refining margins.
  • On a positive note, First Resources posted 47% q-o-q improvement in its 2Q19 core net profit thanks to better CPO price achieved as well as higher downstream earnings.

Key takeaways from teleconference call

  • During its 2Q results teleconference, First Resources lowered its FFB output growth guidance for 2019 to 0-5%, from 5% previously. The group expects a recovery in its FFB output in 2H19 and cited the possibility of tree stress being the culprit for the 7% drop in its FFB output from nucleus estates in 1H19.
  • First Resources predicts that its FFB output will pick up in 2H19 and is positive on CPO price in the near term. First Resources indicated that CPO prices and production have started to recover in 3Q19 and this will benefit its 3Q earnings. EU's plans to impose duties on Indonesian biodiesel producers could impact the nation's biodiesel export volumes in 2020 but this could be offset by higher domestic demand.

Maintain ADD with a lower end-2019 Target Price of S$1.76

  • We cut our FY19-21F EPS forecasts by 19-35% to reflect lower FFB yields and CPO price. This leads to a decline in our Target Price to S$1.76, now based on average P/E of 16x vs. 15x previously to reflect the latest historical 3-year average P/E.
  • Despite the earnings setback, we continue to rate First Resources an ADD as we think its quarterly earnings may have bottomed, and it trades at attractive EV/ha of US$11k.
  • Potential re-rating catalyst/downside risks are higher/lower production and CPO prices.

Ivy NG Lee Fang CFA CGS-CIMB Research | 2019-08-15
SGX Stock Analyst Report ADD MAINTAIN ADD 1.76 DOWN 1.990