First Resources - CGS-CIMB Research 2020-08-15: Most Indicators Point To A Stronger 2H20F

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - Most Indicators Point To A Stronger 2H20F

First Resources's 1H20 core net profit rose 47% to US$43m, thanks to higher CPO price.
We project stronger 2H earnings due to higher FFB output, improving CPO price, lower fertiliser costs and potential drawdown of inventory.
First Resources remains one of our top CPO picks for its young estates, improving earnings prospects and low costs of production.

First Resources (SGX:EB5) posted a 47% jump in 1H20 core net profit of US$43m, thanks to higher ASP for CPO. In 2Q20, FR’s headline net profit fell 5% q-o-q to US$21m (vs. US$22.2m in 1Q20) as lower CPO prices offset higher CPO output (+6% q-o-q). The earnings would have been higher if not for net inventory build-up of 19,000 tonnes in 1H20.
1H core net profit made up 42% of our full-year forecast of US$104m and 35% of consensus’ US$121.6m, broadly in line with expectation as we expect higher CPO prices and production to boost 2H performance.
Over the past five years, First Resources's 1H net profit made up 43% of its full-year results.
First Resources declared flattish interim dividend of 1 S$cts, broadly in line with expectation.

First Resources revealed that the FFB output from its nucleus estates fell by 1% in 1H20, which is slightly below our 1% output growth assumption for 2020 and its earlier guidance of 0% to 5% output growth. First Resources attributed this to the dry weather experienced at its estates in 3Q19 and 1Q20. As such, it is now guiding for full-year output to be flat or slightly negative.
We also gathered that First Resources has applied 60-70% of its budgeted fertiliser requirements for the year in 1H20, which may have led to higher fertiliser costs in 1H20. The group downstream business posted a significant jump in earnings to US$10m in 1H20 from US$3m in 1H19 due to higher refining margin. However, this was 62% lower compared to 2H19.

Assuming First Resources achieved flattish output growth, we estimate 2H20F production will be 32% higher than 1H20.
Secondly, the current CPO price of US$650-700/tonne is higher than its 1H20’s average of US$551 per tonne and First Resources is fairly positive on CPO price prospects for the rest of the year due to recovering demand, Indonesia’s commitment to the B30 mandate and weaker-than-expected supply for 2020.
Thirdly, First Resources’s fertiliser costs will be lower in 2H, having applied 60-70% in 1H20.
Lastly, First Resources had a net inventory build-up of 19,000 tonnes in 1H20 (vs. a drawdown of 48,000 tonnes in 1H19). This could lead to higher CPO sales in 2H20 if the group draws down some of the inventories.

We maintain our EPS forecasts and Target Price of S$1.80, still based on an average P/E of 16x (historical 3-year average P/E). First Resources is one of our top CPO picks due to its young estate profile, low costs of production and improving growth prospects.
See First Resources Share Price; First Resources Target Price; First Resources Analyst Reports; First Resources Dividend History; First Resources Announcements; First Resources Latest News.
Key catalysts are better-than-expected earnings due to higher CPO prices or downstream margin while downside risks are lower CPO prices, rising costs and higher-than-expected yields.

Ivy NG Lee Fang CFA CGS-CIMB Research | Nagulan RAVI CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-15

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