First Resources - UOB Kay Hian 2020-02-27: 2019 Within Expectation, Supported By Strong Downstream


First Resources - 2019 Within Expectation, Supported By Strong Downstream

  • First Resources (SGX:EB5)’s 2019 earnings came in within our expectation, supported by the better downstream earnings as the feedstock prices remained low in 2019. 4Q19 downstream operations contributed about 70% of full-year operating earnings, supported by higher sale volumes and higher utilisation rate.
  • We have pencilled in 3% y-o-y FFB production growth for 2020, in view of more trees turning to prime age, mainly from Kalimantan.
  • Maintain BUY. Target price: S$2.10.


Results within expectation.

  • First Resources reported core net profit of US$32m vs our expectation of US$32m-35m, within our expectation. 2019 full-year core net profit accounted for 98% of our full-year assumption. 2019 earnings was mainly driven by the downstream operation as feedstock cost remained low and biodiesel exports saw good margins in 2019.
  • Having said that, 4Q19 downstream operating profit contributed about 70% of full-year earnings, and we reckon that this is due to higher sales volume, good profit margins from biodiesel exports and lower unit processing cost as plants are running at full utilisation rate.

Declared a final dividend of 1.725 S cents for 4Q19.

  • Total dividend declared for 2019 was 2.35 S cents (vs 2018: 3.25 S cents), with total payout of 31% of underlying net profit.

Strong downstream operation.

  • Downstream earnings had increased by > 100% q-o-q and y-o-y on the back of higher sale volume and higher operating margin. 4Q19 downstream operating margin was the highest since 2014 at US$61/tonne.
  • We reckon that the higher operating margin was due to the timing of purchase of feedstock and also better refining margin brought about by higher utilisation rate.

Lower upstream earnings in 4Q19.

  • Revenue for upstream operation increased by 12% q-o-q on a 9% q-o-q increase in sale volume. However, operating profit dropped by 13% q-o-q, which we attribute to the fair value loss arising from the lag effect in terms of the realisation of CPO prices.


FFB production growth for 2020.

  • We have pencilled in 3% y-o-y FFB production growth for 2020, in line with management’s guidance of 0-5% y-o-y for 2020, with more trees from their Kalimantan estate moving to prime age (contributing ~38% of total planted area and 30% of total production).
  • Management expects 2Q to be the lowest quarter for 2020 due to lower yield and holiday season.

Lower downstream margin for 2020.

  • Downstream margins in 2020 may not be as good as 2019 in the absence of biodiesel exports, as First Resources used to export about 30-40% of their total biodiesel production to EU, which has 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 2020 is 283,281kl (+64.8%yoy) vs its total capacity of 300,000 mt per year.

Capex for 2020.

  • Management has guided a capex of US$110m for 2020, with 50% to be used for the construction of a new integrated processing complex in East Kalimantan (expected to commerce in early-22). This new processing complex will have a similar setup as its current complex in Riau, and have refinery, fractionation and biodiesel processing capabilities.
  • First Resources is also constructing its 18th mill, which will take up about 25% of capex. 10% of capex would be used for replanting, mainly in the Riau region.


Revised net profit forecasts.

  • We have revised our net profit forecast by 4-5% with some house-keeping changes. Our net profit forecasts for 2020-22 are at US$149m, US$156m and US$159m respectively.



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%.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | 2020-02-27
SGX Stock Analyst Report BUY MAINTAIN BUY 2.100 SAME 2.100