First Resources - RHB Invest 2019-08-14: EU Biodiesel Tax To Hurt Downstream Margins


First Resources - EU Biodiesel Tax To Hurt Downstream Margins

  • Still NEUTRAL with a new SGD1.45 Target Price from SGD1.53, 6% downside, derived from 2020F P/E of 14x, which is in line with First Resources’ regional peers. 2Q19 earnings disappointed on dry weather-impacted output.
  • Our preferred Singaporean plantation stock: Wilmar International (Target Price: SGD4.50).

1H19 core net profit was below expectations

  • FIRST RESOURCES LIMITED (SGX:EB5)'s 1H19 core net profit was below expectations, comprising 35% and 24% of our and consensus’ FY19F earnings. The main difference: Lower-than-expected FY19 FFB output (-3.7% y-o-y) – vs our +3.8% projection and management’s +5% guidance – and lower CPO (-17.4%) and PK (-30.3%) prices.
  • First Resources drew down on an additional 31,000 tonnes of CPO during the quarter vs 2Q18’s build-up of 16,000 tonnes.
  • Interim net DPS of 0.625 cents declared (2Q19: 1.25 cents).

Briefing highlights:

  1. 1H19 FFB output fell 3.7% y-o-y on weaker output from Riau due to a change in cropping pattern. Management lowered its target again slightly to 0-5% for FY19 from 5% previously, expecting 2H output to play catch-up on better weather prospects. We maintain our FFB growth forecast at 3.6% for FY19 and 7-8% for FY19-20;
  2. First Resources is maintaining its FY19 cash cost target at USD220/tonne, down from USD237/tonne in FY18. Based on our estimates, unit costs rose 16% y-o-y in 1H19, coming from lower FFB output and higher external FFB acquired of 40,000 tonnes;
  3. Downstream margin improved in 2Q19 to 2.2% from close to zero in 1Q19 (2Q18: 3.8%) vs our projected 3-5% and management’s previous guidance of stable positive margins of 3-5%. Going forward, First Resources warned of lower downstream margins stemming from the EU’s decision to impose an 18% import tax on Indonesian biodiesel starting 1 Jul. This will essentially reduce its biodiesel capacity utilisation by some 30%, as approximately one-third of its output is currently exported. Given that export margins are also healthier than local margins, this could also reduce 2H19 downstream margins. As such, we trim our downstream margins to 1-3% from 3-5% for FY19-21. Nevertheless, going into 2020, assuming the Government’s B30 plan goes ahead as planned, First Resources’ biodiesel utilisation will again rise on local demand to as much as 90%.

We trim FY19F earnings

  • We trim FY19F earnings by 25% and FY20F-21F earnings 6-15% after taking into account our latest in-house FX estimates and lower downstream margins. Target Price is lowered to SGD1.45 from SGD1.53, based on unchanged 14x P/E target, in line with First Resources’ historical and peers’ range of 12-15x. This implies an EV/ha of USD12,000, in line with peers’ USD10,000-15,000 range.
  • While we like First Resources for its good age profile and efficient operations, we believe valuations are fair at 15x FY20. We maintain our recommendation.

Singapore Research RHB Securities Research | 2019-08-14
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.45 DOWN 1.530