First Resources - CGS-CIMB Research 2020-11-16: Higher CPO Price Expected To Lift 4Q20F

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - Higher CPO Price Expected To Lift 4Q20F

First Resources's 9M20 net profit rose 41% to US$80m, above our full-year expectation.
We project First Resources's 4Q20F earnings to stay strong, driven by higher CPO price and lower fertiliser costs.
We cut our target price to S$1.64 as we reduce our earnings forecasts to reflect lower FFB output growth and potential changes in export levy. Reiterate ADD.

First Resources (SGX:EB5) posted a 41% jump in 9M20 reported net profit of US$80m, thanks to higher ASP for CPO.
In 3Q20, First Resources’s headline net profit rose 76% q-o-q and 33% y-o-y to US$37m as higher CPO prices offset lower CPO output (-2% y-o-y). 9M20 earnings would have been higher if not for a net inventory build-up of 24k tonnes in 9M20 vs. drawdown of 16k tonnes in 9M19.
First Resources's 9M20 core net profit made up 77% of our full-year forecast of US$104m and 70% of consensus’s US$115m. We deem the 9M20 as above our expectation due to better-than-expected CPO price. However, the results were broadly in line with consensus’s full-year estimate.

First Resources revealed that the FFB output from its nucleus estates fell by 7%/3.5% y-o-y in 3Q20/9M20, which is below our flat output growth assumption for 2020F but broadly in line with its guidance for full-year output to be flat or slightly negative. However, the drop in production volumes was more than offset by higher ASP in 3Q20, which led to higher revenue and profit.
We also gathered that it had applied 90% of its budgeted fertiliser requirements for the year in 9M20, which will lead to lower fertiliser costs for 4Q20.

We expect First Resources’s FFB output from its nucleus to be weaker in 4Q20 against 3Q20, in line with historical seasonality. However, the current CPO price of US$850/tonne is higher than its 1H20 average of US$551/tonne and First Resources is cautiously optimistic on CPO price prospects for the rest of the year due to tight global edible oil supplies, which will more than offset the weaker output.
First Resources also indicated that the Indonesia government is currently mulling over a potential progressive export levy model to fund the B30 biodiesel programme. This has resulted in the Indonesia palm market factoring as high as US$120/tonne export levy into local CPO prices in Indonesia although the official export levy rate is US$55/tonne. First Resources is relatively shielded as it refines most of its CPO.

We raise our First Resources's FY20 earnings forecast by 12% to reflect higher CPO price but lower our FY21-22F earnings by 12-17% to reflect lower output and potential changes in export levy. Our target price falls to S$1.64 (unchanged historical average 3-year P/E of 16x) as we revise our earnings and roll forward our target price to end-2021.
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Re-rating catalysts are higher CPO prices or downstream margin while downside risks are lower CPO prices, rising costs and lower-than-expected yields.

Ivy NG Lee Fang CFA CGS-CIMB Research | Nagulan RAVI CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-16

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