First Resources - UOB Kay Hian 2019-08-21: Waiting To Accumulate During Price Weakness


First Resources - Waiting To Accumulate During Price Weakness

  • Production recovery comes on time to catch better selling prices. 2H19 earnings recovery is well supported by higher ASP, better production and lower cost.
  • Slower production growth for 2019 was guided earlier but the impact on yield after two years of strong production was underestimated. 2Q19 earnings may have bottomed and any further price weakness is a good time to accumulate.
  • Maintain HOLD. Target price: S$1.60. Entry price: S$1.45.


Revised production growth guidance to 0-5% y-o-y for 2019.

  • FIRST RESOURCES LIMITED (SGX:EB5) management had revised down production growth to 0-5% y-o-y for 2019 (from 5-10%). In our earnings estimates, we had factored in production growth of 3% y-o-y, which is within the guidance. Peak production for 2019 is likely to come only in 4Q19 due to the delay in the dry season.
  • Oil palm trees in high production areas in Riau (about 70% of total contribution) are also growing older with an average age of 16-17 years vs the group’s average age of 12 years. Note that production from plasma has dropped more severely than nucleus area, and from the Riau area as well.

58% of production to come in 2H19.

  • It is not a surprise to see a much stronger production in 2H. Based on First Resources’s production track record, production contribution from 2H of the year went up to as high as 62% in 2016 and ranged 57-58% for 2014, 2015 and 2017. Based on 3% production growth assumption, we are expecting 2H19 FFB production at 1.82m tonnes, or 58% of 2019 production.

A better 2H19.

  • Management had guided for a better 2H19 vs 1H19 on the back of higher production and higher selling prices. Based on our production estimate, 2H19 production growth is expected at 11% y-o-y and 40% h-o-h. CPO spot prices are currently at US$500/tonne vs ASP of US$476/tonne in 1H19.
  • In addition, estates cost is usually lower in 2H given that about 60% of the full-year fertiliser is applied in 1H19. Fertiliser cost makes up about 40% of total cost of production.

Lower contribution from downstream, impact from EU-imposed tariff.

  • The European Union (EU) had imposed tariffs of 8-18% on biodiesel from Indonesia in Aug 19. First Resources exports about 33% of its sales volume to the EU. With this, management guided lower biodiesel exports to the EU in 2H19.
  • With the B30 biodiesel blending mandate kicking in in Jan 20, management believes it may cushion the lower export to EU.


B30 biodiesel implementation.

  • The Indonesian government will implement the B30 biodiesel blending mandate in Jan 20. With the increasing biodiesel demand in Indonesia, First Resources may increase its biodiesel plant capacity. Its plants are running at about 90% utilisation for the B20 biodiesel blending mandate.
  • Management had guided it would need 18-24 months to build a new biodiesel plant. Management also mentioned that the CPO Fund under Badan Pengelola Dana Perkebunan Sawit (BPDP) should be sufficient to support B30. If CPO prices go above US$570/tonne, the export levy will resume to replenish the fund.

Fertiliser application on track.

  • First Resources’s fertiliser application has reached about 60% for 1H19, on track to reach its full-year target. The company typically maximises its feriliser application programme in 3Q.

New planting and replanting.

  • First Resources is planting 2,000-3,000ha for 2019, of which about 50% is for replanting.


Maintain 2019-20 net profit forecasts.

  • We maintain our net profit forecasts of US$99.1m, US$146.6m and US$163.3m for 2019-21 respectively.


Maintain HOLD and target price of S$1.60.

  • We value First Resources based on 13x 2020F PE, or 1SD below the stock’s 5-year average. At mean PE of 16x, First Resources’s fair value would be S$2.00.
  • We like First Resources for its good track record of delivering better-than-peers’ performance, and First Resources is also highly leveraged to CPO prices. Entry price is S$1.45.


Stronger-than-expected CPO price recovery.

  • First Resources’s earnings are still largely dependent on upstream contribution, and higher CPO prices are positive to its earnings. Every 5% increase in CPO ASP would increase First Resources’s net profit by 12-15%. CPO prices have recovered 6.7% ytd.
  • We expect CPO prices to close higher by end-19. For 1H19, the average CPO price was RM1,996/tonne. We are expecting 2H19 CPO price to average at RM2,150-2,250, and end year at an average of RM2,100.

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.600 SAME 1.600