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First Resources - UOB Kay Hian 2019-11-13: 3Q19 Earnings Recover On Higher Sales But Slightly Below Expectations

FIRST RESOURCES LIMITED (SGX:EB5) | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 3Q19 Earnings Recover On Higher Sales But Slightly Below Expectations

  • First Resources reported core net profit of US$27.8m, excluding forex loss. Results came in slightly below our expectation due to net inventory build-up of 32,000 tonnes.
  • We had revised our FFB production growth forecast from 3% to 0% y-o-y for 2019 as the dry weather in 3Q19 had a more severe impact on yield than our initial assessment. 4Q19 earnings could be better q-o-q and y-o-y on higher ASP and inventory drawdown which would offset weaker production.
  • Maintain BUY with a lower target price of S$1.85.



3Q19 RESULTS


Results slighlty below expectations.

  • FIRST RESOURCES (SGX:EB5) registered a net core profit of US$27.8m (+61% q-o-q, -23% y-o-y), excluding loss on forex. The results were slightly below our expectation of US$35-38m as there was an unpredictable net inventory build-up of about 32,000 tonnes in 3Q19. See First Resources Announcements.
  • Core net profit for 9M19 was at US$56.8m or 60% of our full-year assumption. We reckon that CPO ASP would be higher in 4Q19 and the current high selling prices would only be reflected in 2020.

Better performance qoq for 3Q19.

  • First Resources’ upstream operations earnings reported growth of 69% q-o-q, boosted by better sales volume for CPO and PK which had increased by 24% and 52% q-o-q respectively. CPO production had also increased by 38% q-o-q in 3Q19. The strong sales volume in 3Q19 had offset the weakness in ASPs of CPO and PK.

Lower yoy earnings for 3Q19.

  • The lower y-o-y earnings was mainly attributed to weaker ASPs and increased purchases of palm oil products from third parties. This had impacted gross profit margins for 9M19 which were lower y-o-y at 34.4% (9M18: 46.2%).


STOCK IMPACT


Revised production guidance to flat growth from 0-5% yoy growth for 2019.

  • Management had revised down the production growth guidance to flat (or even slightly negative y-o-y growth) from 0-5% y-o-y growth for 2019. Despite higher production in 3Q19, it was still below management’s expectation. This was due to the dry weather in 3Q19 and this is expected to have an impact on older age trees in the Riau region (70% of First Resources’ production) in 4Q19 as well.
  • In our earnings forecast, we had revised down our FFB production forecast to 0% for 2019. Thus, 3Q19 would be the peak production quarter as output for 4Q19 is expected to taper off.

Biodiesel plant ready for B30 biodiesel blending mandate.

  • Biodiesel margin may be lower in 2020 as First Resources used to export about 40% of their total biodiesel to the EU which brings in better margins. However, with the B30 biodiesel mandate from the Indonesia government, biodiesel capacity will be fully utilised to produce biodiesel meant for domestic use. The total B30 biodiesel mandated allocation for First Resources in Jan-Dec 20 is at 283,281kl (+64.8%yoy) vs its total capacity of 300,000 mt per year.

Fertiliser application.

  • Management had mentioned that fertiliser application in 3Q19 had been slow down due to the dry weather and management would try to complete the fertiliser application process by 4Q19.

Expecting better earnings in 4Q19.

  • The earnings impact from lower production in 4Q19 could be compensated by an inventory drawdown and also better palm selling prices.


EARNINGS REVISION/RISK


Revised 2019-20 net profit forecasts.

  • We had revised our earnings forecast by 3-5% with lower FFB production growth expected for 2019 and lower margins for the biodiesel operations.
  • Our revised net profit forecasts for 2019-21 are at US$96.2m, US$ 137.9m and US$163.1m respectively.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST


Stronger-than-expected CPO price recovery.

  • First Resources’ 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’ net profit by 12-15%.





Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 1.85 DOWN 1.900



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