First Resources - DBS Research 2019-11-12: Tailwinds From Higher CPO Prices

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FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - Tailwinds From Higher CPO Prices

• First Resources' 3Q19 NPATMI of US$28m was in line.
• Expecting stronger earnings in 4Q19 on higher CPO prices.
• CPO price assumption of US$543 per MT in 2020; translate into 59.4% y-o-y earnings recovery in 2020.
• Maintain BUY with higher Target Price of S$1.95.

Recovery in quarterly earnings has materialised – 3Q19 earnings surged c.60% q-o-q.

• FIRST RESOURCES LIMITED (SGX:EB5)'s 3Q19 NPATMI reached US$28m (-29% y-o-y, +64% q-o-q), and is on track to achieve our full year estimate led by strong sales volume and output, resulting in stronger profitability q-o-q. See First Resources Announcements.
• We are keeping our FY19F earnings intact, and expect contribution to be stronger from 4Q19 due to higher palm oil prices and strong output momentum. We have raised our FY20/21F earnings by 7% and 4% to reflect the higher profitability from operations.

CPO price tailwinds to support earnings ahead

3Q19: Earnings surged c.60% q-o-q, on track to meet our full year estimate

• First Resources booked 3Q19 NPATMI of US$28m (-29% y-o-y, +64% q-o-q) on track to meet our full year estimate.The strong performance was driven by strong sales volumearising from strong output. Earnings were significantly higherq-o-q as higher volumes had offset the relatively fixed costper hectare in the palm oil business.
• Topline reached US$143m (-21% y-o-y, -4.1% q-o-q). CPO and PK sales volume reached 227k MT (-6% y-o-y, +24% q-o-q) and 52k MT (flat y-o-y, +52% q-o-q) respectively, albeit we have yet see stronger ASPs in the quarter given the improving CPO price trend in 3Q19, which was probably due to CPO inventory carried forward from the previous quarter. CPO and PK ASP in 3Q19 reached US$454 per MT (-14% y-o-y, -8% q-o-q) and (-25% y-o-y, -8% q-o-q) respectively.
• First Resources’ fresh fruit bunches (FFB) production reached 1m MT (+3% y-o-y, +38% q-o-q). Both own and external fruits production increased by 38% q-o-q and 36% q-o-q to 893k MT (+2% y-o-y) and 118k MT (+13% y-o-y) respectively, which resulted in total CPO and PK production of 243k MT (flat y-o-y, +41% q-o-q) and 55.5k MT (+1% y-o-y, +41% q-o-q) respectively.

Earnings revision: Raised FY20/21F earnings by 7%/4%

• We raised our FY20/FY21F earnings by 7%/4% to US$137m (+59.4% y-o-y)/US$146m (+6.3% y-o-y) mainly due to higher profitability stemming from
  1. more conservative fertiliser application assumption after the high application this year due to the drier than expected weather,
  2. higher CPO price assumption of US$543 per MT (+9% y-o-y) in 2020. Our FY20/21F earnings are largely in line with consensus.
• Meanwhile, we have retained our FY19F earnings as we believe that the higher palm oil prices recently will translate into stronger earnings in 4Q19, while strong output momentum will be sustained. The average palm oil price has reached US$507 per MT year to date, which is largely in line with our FY19 assumption of US$500 per MT.
• Our FY19F earnings is 11% below consensus mainly due to our conservative projection on prices of external fruits prices and more aggressive fertiliser expenses.

Rating and Target Price:

Maintain our BUY rating with higher Target Price of S$1.90

• We reiterate our BUY rating with higher Target Price of S$1.95 per share to reflect our higher earnings estimates. Our Target Price implies 16.5x FY20F PE, which is reasonable in our view considering its strong plantation assets, double digit ROE, and earnings growth. See First Resources Share Price; First Resources Target Price.
• We believe First Resources’ earnings will continue to improve on higher palm oil prices as seen in the spot market. There is potential earnings upside from any rational resolution to the US-China trade deal which would bode well for soybean prices as well as CPO prices. With our new FY20 CPO price of US$543 per MT, we expect First Resources earnings to recover to US$137m in 2020, lower than consensus mainly we expect the higher palm oil price translate into pricier external fruits purchase price.

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

• First Resources’ aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong CPO volume and yield. Higher CPO yields on maturing trees would improve First Resources’ ROIC and profitability metrics on the back of an expanded operating scale, to result in stronger earnings growth momentum ahead.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-11-12

SGX Stock Analyst Report BUY MAINTAIN BUY 1.950 UP 1.800