First Resources - DBS Research 2019-08-15: Earnings Bounced Q-o-q; Stronger Recovery To Come


First Resources - Earnings Bounced Q-o-q; Stronger Recovery To Come

  • FIRST RESOURCES (SGX:EB5)'s 2Q19 NPATMI of US$16.9m slightly below expectation.
  • Improvement on q-o-q basis likely to continue in 2H19.
  • Revise earnings to account for pricier external fruits in 2019.
  • Maintain BUY with lower Target Price of S$1.80.

Earnings jumped 38% q-o-q, but still slightly off.

  • FIRST RESOURCES (SGX:EB5)'s 2Q19 NPATMI reached US$16.9m (-52.8% y-o-y, +38% q-o-q) slightly below our forecast due to narrower-than-expected margin expansion in the period, which was driven by pricier external fruits.
  • We revised down our FY19/20 earnings forecasts by 8% and 2% to US$86m and US$128m respectively, mainly on higher external fruit price assumption, and hence expect softer margin recovery.

Where we differ: We like First Resources’ organic growth prospects.

  • We believe First Resources’s young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on maturing trees will improve First Resources’s ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead.
  • First Resources’s aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong volume and earnings growth in FY19F.

Potential catalyst: Earnings improvement.

  • 2H19 output performance and steady refining margin are expected to help profitability. Moreover, First Resources’s younger trees of 12 years old means that First Resources’s earnings growth will be driven not only by palm oil price but also volume expansion.

Earnings rebounded q-o-q; expecting stronger recovery to come

2Q19: Earnings rebounded 38% q-o-q

  • First Resources's 2Q19 NPATMI reached US$16.9m (-52.8% y-o-y, +38% q-o-q) slightly below our forecast due to narrower-than-expected margin expansion in the period, which was driven by pricier external fruits. This halted the full margin recovery potential, as seen in the company’s profitability level which rebounded from 1Q19, but still lower than in 2Q18.
  • Top line reached US$143m (-20.8% y-o-y, -4.1% q-o-q) on track to meet our estimate due to lower price y-o-y amid relatively stable sales volume performance. CPO and PK sales volumes reached 183.6k MT (-4% y-o-y, -1% q-o-q) and 34.4k MT (-5% y-o-y, -1% q-o-q) respectively. The sales volume performance was partially offset by the inventory liquidation, amid the soft output trend in 2Q19. CPO and PK output reached 173.1k MT (-12% y-o-y, -1% q-o-q) and 39.4k MT (- 9% y-o-y, -3% q-o-q) respectively, implying stable CPO yield performance of 3.9 MT/ha in 2Q19.
  • CPO and PK ASP reached US$492 per MT (-13% y-o-y, +7% q-o-q) and US$287 per MT (-21% y-o-y, -13% q-o-q) respectively, largely in line with CPO price index trend. The lower realised price was the key driver of 2Q19 earnings performance.

Earnings revision: Earnings revision premised on stronger recovery ahead

  • We cut our FY19 earnings forecast by 8% to US$86m (-28.2% y-o-y) mainly on pricier external fruits as seen in 2Q19, even amid the still low palm oil price trend.
  • Meanwhile, we keep our top-line performance as overall realised palm oil price for First Resources is already in line with our CPO price forecast of US$500 per MT. First Resources’s 1H19 earnings achievement account for 35% of our FY19 earnings forecast, which we believe is reasonable for this counter, considering its seasonal output trend which is skewed to the second half of the year. This provides stronger leverage over its cost and hence, prospectively better profitability.
  • Our FY19 and FY20 earnings forecasts are largely below consensus estimates mainly due to our conservative CPO price assumptions of US$500 per MT and US$543 per MT respectively. We also assume lower profitability as the external fruit prices did not drop as much as we had previously expected amid the low CPO price trend.

Rating and target price: Maintain BUY call with slightly lower Target Price of S$1.80

  • We maintain our BUY rating with a lower 2020 DCF-based target price of S$1.80. Our BUY rating is premised on First Resources being the strongest asset in its class and ability to withstand the current low price cycle due to its strong CPO yield and exposure to refineries which provide a sound profitability buffer.
  • First Resources is also set to capitalise on higher CPO prices better than peers, due to its next leg of earnings growth from volume expansion.

William Simadiputra DBS Group Research | 2019-08-15
SGX Stock Analyst Report BUY MAINTAIN BUY 1.80 DOWN 1.950