First Resources - CGS-CIMB Research 2020-05-22: 1Q20 Net Profit Up From Higher CPO Price


First Resources - 1Q20 Net Profit Up From Higher CPO Price

  • First Resources’s 1Q20 net profit made up 18% of our full-year forecasts.
  • Despite y-o-y growth, earnings were slightly below forecast due to lower-than-expected FFB yield, inventory build-up and front-loading of fertiliser costs.
  • We cut our FY20-22F earnings to reflect lower yields and Target Price to S$1.80 but reiterate our ADD rating due to its young estates and low costs of production.

1Q20 net profit made up only 18% of our full-year estimates

  • First Resources (SGX:EB5)’s has discontinued quarterly reporting but continues to provide key financial highlights for 1Q and 3Q, starting this year. In 1Q20, First Resources’s headline net profit grew by 81% y-o-y to US$22.2m, due to higher palm product prices.
  • We are not able to deduce its core net profit as there was no disclosure on non-core items. However, we gathered that there were some forex gains. The reported net profit made up 18% of our and 16% of consensus full-year forecasts. This appears to be slightly below, as over the past five years, 1Q net profit made up 20% of its full-year results.

Possible reasons behind weaker-than-expected 1Q20

  • The group revealed that the FFB output from its nucleus estates fell by 4% in 1Q20, which is below our full-year projection of 5% output growth. First Resources attributed this to the dry weather experienced at its estates in 3Q19 and 1Q20. However, it is maintaining its FFB output guidance of 0-5%, although the group now feels it is more likely to achieve the lower end of this range.
  • We also gathered that it has applied 30% of its budgeted fertiliser requirements for the year in 1Q20, which may have led to higher fertiliser costs.
  • Lastly, First Resources had a net inventory build-up of 8,000 tonnes in 1Q20 (vs. a drawdown of 17,000 tonnes in 1Q19), leading to lower sales volumes. The group did not disclose earnings from its downstream businesses but indicated that it was profitable in 1Q20.

Key takeaways from First Resources's results briefing

  • First Resources is maintaining its 2020 FFB output growth guidance of 0% to 5% (vs. -2% for 2019) and cost of production of US$210-230 per tonne (vs. US$230/tonne for 2019).
  • In terms of CPO price prospects, First Resources indicated that Covid-19 has impacted demand in India and China and prices are expected to remain weak in the short to medium term. However, it is seeing a recent recovery in Chinese demand, while the wider CPO discount over soybean oil will be supportive of prices.
  • First Resources also revealed that its plans to build a new integrated processing complex in East Kalimantan will be delayed to 2021; this will reduce its capex needs for this year to US$70m (from US$110m previously).

Reiterate ADD, with a lower Target Price of S$1.80

Ivy NG Lee Fang CFA CGS-CIMB Research | Nagulan RAVI CGS-CIMB Research | 2020-05-22
SGX Stock Analyst Report ADD MAINTAIN ADD 1.80 DOWN 1.910