First Resources - RHB Invest 2019-11-12: 2020 Biodiesel Allocation Up 63% Y-o-y; BUY


First Resources - 2020 Biodiesel Allocation Up 63% Y-o-y; BUY

  • Keep BUY with a higher SGD1.95 Target Price from SGD1.90, 13% upside, derived from 18x 2020F P/E.
  • First Resources's 3Q19 earnings slightly surpassed our expectations, but was below consensus projections. We continue to like First Resources for its cost-efficient operations and booming biodiesel industry exposure.

9M19 core net profit slightly above

  • FIRST RESOURCES (SGX:EB5)'s 9M19 core net profit was slightly above our expectations, comprising 78% of our FY19F bet profit, but below consensus: 63% of earnings. See First Resources Announcements.
  • The main difference: Slightly lower-than-expected 3Q19 unit costs (estimated at -19% y-o-y) due to lower fertiliser application during the quarter and higher-than-expected downstream margins. This was offset by slightly lower-than-expected FFB output (-1.6% y-o-y) vs our +3.8% projection and management’s 0% to +5% guidance – and lower CPO (-15.9%) and PK (-29.3%) prices.
  • First Resources drew down 16,000 tonnes of CPO during 9M19 vs 9M18’s build-up of 38,000 tonnes.

Briefing highlights:

  • Management lowered its target again slightly to flat FFB output growth for FY19 from 0-5%, expecting 4Q19 to be weaker than 3Q19. We lower our FFB growth forecast at 0.7% for FY19, but maintain our 6-10% forecasts for FY20-21. While weather has normalised at its estates, the impact of the three months of dry weather could be seen in 1H20, although this will be offset somewhat by 5,000ha of new areas coming into maturity in FY20;
  • First Resources is maintaining its FY19 cash cost target at USD220.00/tonne, down from FY18’s USD237.00/tonne. Based on our estimates, unit costs rose 2% y-o-y in 9M19, coming from lower FFB output;
  • Downstream margins improved in 3Q19 to 4.3% from 2.2% in 2Q19 (3Q18: 2.7%) from improved margins for both refinery and biodiesel. Despite the EU import tax on Indonesian biodiesel, First Resources managed to continue to run its biodiesel capacity at 100% in 3Q19. For 4Q19, management is guiding for margins to be sustained at 3Q19 levels. As this is higher than our projected 1-3% assumption for FY19, we raise our assumptions to 2-4%;
  • For FY20, First Resources has received a biodiesel allocation of 280k kilolitres (+63% y-o-y ) from 2019’s allocation of 172k kilolitres – this is based on Indonesia’s B30 mandate. This will imply that all of First Resources’s biodiesel capacity will be for the domestic market. Given that export margins are also healthier than local margins, this could reduce FY20 biodiesel margins slightly.

We raise our FY19F-21F earnings

  • We raise our FY19F-21F earnings 4-9% after taking into account higher downstream margins and lower FFB growth for this year.
  • Our Target Price rises slightly to SGD1.95 from SGD1.90 on unchanged 18x P/E, 1SD above First Resources’s historical average. This implies an EV/ha of USD13,000, in line with peers’ USD10,000-15,000 range. See First Resources Share Price; First Resources Target Price.
  • The firm’s mostly upstream operations will stand it in good stead in a CPO price upcycle, while First Resources will also benefit from higher biodiesel profits as Indonesia implements its B30 mandate in 2020. We maintain our recommendation on this stock.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.95 UP 1.900