First Resources - UOB Kay Hian 2020-05-26: 1Q20 Performance Dragged Down By Lower Sales Volume

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 1Q20 Performance Dragged Down By Lower Sales Volume

First Resources reported 1Q20 net profit of US$22.2m (-31% q-o-q, +81% y-o-y). Key highlights:
1. 1Q20 production was below expectation and this led to lower sales volume;
2. management guided 2020F FFB growth will be at the lower end of 0-5% as the impact from dry weather was more severe than expected;
3. capex for 2020 cut by US$40m; and
4. purchase orders for FR’s biodiesel dipped in May but have recovered for June.

First Resources (SGX:EB5) reported net profit of US$22m for 1Q20 (+81% y-o-y, -31% q-o-q). Net profit y-o-y growth of 81% was higher than EBITDA growth of 38% and we believe this was due to forex gains. However, this was not disclosed in the executive summary for 1Q20. The key variance from our expectation for 1Q20 is lower-than-expected production and sales volume.

This was mainly due to lower q-o-q production as the impact from the dry weather was more severe than expected. Management mentioned that production had started to improve in April and May as rainfall returned to normal levels in Apr 20.

This was mainly due to higher feedstock prices and lower q-o-q sales volume on lower purchases of CPO from third parties and inventory build-up vs inventory drawdown in 1Q19 and 4Q19.

Biodiesel sales were stable. Management said biodiesel orders were on target in 1Q20 and April, fell 20% m-o-m in May but increased about 20% m-o-m in June.

First Resources maintained FFB production growth guidance at 0-5% y-o-y for 2020 although management expects growth to come in at the lower end of guidance, considering the disappointing 1Q20 production.
We pencilled in 2% y-o-y FFB production growth for 2020, mainly supported by more trees from the Kalimantan estate moving to prime production age (contributing 38% of total planted area and 30% of total production). As production has start to recover in April, 2Q20 production could be better than 1Q20 and this would mitigate the impact from q-o-q lower ASP.

Sales volume for its refined products should pick up as demand from China and India starts to recover as the countries’ lockdown eases. Biodiesel volume delivered for 2Q20 is likely to be slightly lower than 1Q20, given the diesel demand in May was lower, thus the biodiesel volume required for the 30% blending will also be reduced.
We expect the downstream operating margin to be better in 2Q20 on the back of higher utilisation rate and lower feedstock prices.

Management had revised capex for 2020 from US$110m to US$70m The reduction will come from capex for the construction of a new integrated processing complex which will be postponed to 2021.

We maintain our net profit forecasts for 2020-22 at US$111.3m, US$147m and US$154m respectively.
Maintain BUY with a higher target price of S$1.65 as we roll our valuation to 2021. Our target price is pegged at 12x 2021F PE, which is 1SD below the stock’s 5-year average mean PE of 15x.
We like First Resources for its good track record of delivering better-than-peers’ performance, and First Resources is also highly leveraged to CPO prices.
See First Resources Share Price; First Resources Target Price; First Resources Analyst Reports; First Resources Dividend History; First Resources Announcements; First Resources Latest News.

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 to CPO ASP would increase First Resources’s net profit by 12-15%.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-26

SGX Stock Analyst Report BUY MAINTAIN BUY 1.65 DOWN 1.700