First Resources - DBS Research 2020-05-26: Aiming For Stronger Harvest In 2Q20


First Resources - Aiming For Stronger Harvest In 2Q20

  • First Resources's 1Q20 earnings of US$22m (+81% y-o-y, -30% q-o-q) was impacted by lower sales volume.
  • Expecting stronger nucleus fruits output and prices in 2Q20 to support earnings performance.
  • First Resources is trading at -2 standard deviation of its 5-year average PE multiple, which is unwarranted.
  • Maintain BUY with lower Target Price of S$1.70.

1Q20: Lower sales volume and inventory buildup affected earnings despite CPO ASP improvement

  • First Resources (SGX:EB5) posted 1Q20 earnings of US$22m (+81% y-o-y, -30% q-o-q), which was behind our estimate due to lower than expected sales volume. Earnings was up y-o-y (but lower q-o-q) due to higher palm oil price ASP y-o-y.
  • Topline reached US$140m (-6.1% y-o-y, -23.8% q-o-q), albeit the stronger ASP trend y-o-y and reported nucleus and plasma Fresh Fruits Bunches (FFB) output was within our estimate. First Resources’s top line performance was dragged by lower than expected external fruits purchases which affected CPO production and sales volume, and led to net inventory buildup of 8,000 MT.
  • Total harvested FFB reached 707k MT (-2.3% y-o-y, -21% q-o-q) which consisted of own and smallholders FFB output of 628k MT (-3.9% y-o-y, -22% q-o-q) and 81k MT (+16% y-o-y, -7% q-o-q) respectively.

Earnings revision: Earnings cut on lower CPO sales volume – assuming external fruits purchases stay low for the rest of 2020

  • We cut our FY20/21F earnings by 16%/12% to US$118m (+33% y-o-y) /US$128m (+8.2% y-o-y) respectively. This is premised on weaker than expected external fruits purchases in 2Q20 and 3Q20 on lower fruit output from surrounding estates, which results lower mills’ utilization rate and profitability, slightly offset by an improvement in palm oil ASP.
  • We forecast nucleus fruits will form the backbone of performance from 2Q20 onwards, nucleus fruits have better extraction rates and margins vs. external fruits. Our FY20F earnings is 12% below the street level due to this factor.
  • Our capex projection is unchanged at US$131m in 2020, below management’s latest guidance of US$70m in 2020 to mitigate any uncertainties ahead. A major chunk of capex on the downstream business expansion has been put on hold to at least next year.

Rating and Target Price: Maintain BUY with Target Price of S$1.70

  • Palm oil price has regained traction in May on lockdown relaxations in the EU and India. India has shown interest to purchase palm oil from Malaysia recently, and this should keep the stockpile tight and help to withstand price pressures ahead. However, we do not foresee a scenario for palm oil prices to rebound to the level seen earlier in the year due to still weak underlying demand due to COVID-19 pandemic.
  • We mentioned previously that India’s import resumption is a critical point to monitor as this is positive for prices. (Please see report: Regional Plantation Companies - DBS Research 2020-05-12: At A Crossroad? ). Furthermore, stronger crude oil prices will also allay concerns on global demand for fuel. Our FY20 CPO price assumption is US$596 per MT (RM2,450 per MT).
  • However, we believe First Resources’s current share price implies that the market is pricing in a palm oil price of US$430-450 per MT and earnings of US$60m-70m which is even lower than last year’s level as we believe 1Q20 weakness is temporary. The stock is trading at -2 standard deviation of its 5-year average PE multiple – First Resources share price is also below 1H19 last year, when palm oil supply and demand were skewed towards oversupply given that Malaysia’s stockpile level was above 2.5m MT.
  • 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 maintain our BUY rating with a lower Target Price of S$1.70 on our new earnings forecast. Our Target Price implies 17x FY20F PE, which is close to First Resources’s 5-year average PE multiple of 17.3x.
  • First Resources is one of our top picks in the palm oil sector, due to its strong productivity and profitability performance.

William Simadiputra DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.70 DOWN 1.990