First Resources - DBS Research 2020-02-26: Riding Up With Palm Oil Price


First Resources - Riding Up With Palm Oil Price

  • First Resources's FY19 earnings reached US$89m, in line with our estimate.
  • Inventory drawdown and external fruits supported performance – soft output in 4Q19 in line with industry.
  • Capitalising on higher CPO prices in 2020 – earnings to jump 58% y-o-y from low base in 2019.
  • Maintain BUY with Target Price of S$1.99.

4Q19: On track with our estimate

  • First Resources (SGX:EB5) posted 4Q19 earnings of US$32m (+85% y-o-y, +15% q-o-q), on track with our estimate. 4Q19 performance was mainly driven by the higher palm oil prices and sales volume performance, which were partially supported by inventory drawdown and higher external CPO processing, amid the soft output performance in 4Q19, in line with the industry trend.
  • CPO yield (nucleus + plasma) in 2019 reached 3.9 MT/ha, slightly lower than 2018 level of 4.1MT/ha due to soft output performance in 4Q19.
  • CPO and PK sales volumes reached 248k MT (+17% y-o-y, - 9% q-o-q) and 60.2k MT (+35% y-o-y, +16% q-o-q) respectively, followed by CPO and PK prices of US$469 per MT (-5% y-o-y, +3% q-o-q) and US$258 per MT (-24% y-o-y, -2% q-o-q). The higher palm oil price has yet to fully reflect the recovery from the palm oil benchmark yet in 4Q19.
  • Total harvested Fresh Fruit Bunches (FFB) reached 894k MT (+3% y-o-y, -12% q-o-q) with nucleus and plasma FFB composition of 806.9k MT (+4% y-o-y, -10% q-o-q) and 87.2k MT (-7% y-o-y, -27% q-o-q) respectively. CPO and PK production reached 220k MT (+14.4% y-o-y, -9% q-o-q) and 50k MT (+10.4% y-o-y, -10% q-o-q) respectively.

Earnings forecast: Earnings to jump from low base 2019

  • Despite the good 4Q19 performance, we lowered our FY20/21 earnings forecasts slightly by 5%/4% to account for higher financing costs arising from new capital expenditure assumption of US$131m (guidance US$110m). However, we maintain our overall operational and CPO ASP for now.
  • We now forecast FY20 earnings to jump by 58% y-o-y to US$149m, mainly driven by higher palm oil prices. We expect the palm oil price to average at US$596 per MT (+19% y-o-y) in 2020 driven by the tightening supply and demand situation. We believe our CPO price is anticipating the COVID-19 outbreak and current tight price spread with the soybean oil price. Our FY20 earnings forecast is largely in line with consensus.
  • The next share price catalyst, apart from dividends, will be the earnings performance in 1H20, which jumped from last year’s low base. CPO price averaged at only US$490 per MT in 1H19 and a higher palm oil price of above US$500 per MT is required to provide a strong footing for y-o-y earnings recovery.

Rating and target price: Maintain BUY with Target Price of S$1.99

  • We believe the share price correction in February due to COVID-19 concerns presents a window of opportunity to buy the shares at a reasonable valuation. We believe the COVID-19 epidemic will not drag palm oil prices below US$500 per MT level again, due to demand buffer from Indonesia biodiesel and tight palm oil output outlook in 2020.
  • Moreover, First Resources remains our top pick across the plantation universe mainly for its relatively young tree age of 12 years, which should provide sound organic growth potential for the next couple of years.
  • We believe First Resources is the best play to capitalise on higher palm oil prices in 2020, while it has also proven to be defensive against the bear price trend as seen in 2019, thanks to its strong productivity performance.
  • We maintain our BUY rating with a slightly lower Target Price of S$1.99 post our 5% 2020 earnings revision. Valuation, we believe, is undemanding as the share is trading at 13.4x FY20 PE, close to -2SD of its five-year average PE multiple of 17.1x.
  • See First Resources Share Price; First Resources Target Price; First Resources Analyst Reports; First Resources Dividend History; First Resources Announcements; First Resources Latest News.
  • We believe First Resources deserves to be re-rated on
    1. higher palm oil price outlook,
    2. strong organic growth prospects in the next three years, which should sustain its double-digit ROE performance ahead.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | 2020-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.99 DOWN 2.100