First Resources - RHB Invest 2020-11-16: Downstream Earnings Set To Take Centre Stage; BUY


First Resources - Downstream Earnings Set To Take Centre Stage; BUY

  • First Resources’ 9M20 earnings was above ours, but in line with consensus. First Resources may not be as negatively affected by the soon-to-change export levy structure, given its ability to switch more of its sales to refined CPO.
  • Valuations remain attractive at 11x 2021F P/E below its 13x historical mean. Maintain BUY on First Resources with S$1.45 target price, 13% upside and c.3% yield.

First Resources' 9M20 earnings above our expectations

  • First Resources (SGX:EB5)'s 9M20 earnings above our expectations, comprising 77% of our FY20 forecast but in line with consensus, at 70%. Although FFB’s output was lower than expected, this was offset by stronger ASP.
  • First Resources also had 24,000 tonnes of inventory build-up in 9M20 (9M19: 16,000 tonnes drawdown). We expect 4Q20 to see better earnings on the back of higher CPO prices.

Briefing highlights:

  • 9M20 FFB production fell 3.5% y-o-y, below First Resources’s original guidance (flat to slightly negative) and our projected 0.4% growth for FY20. First Resources now expects FY20 FFB growth to slightly negative, with the peak month already over in September. We reduce our FY20 growth assumption to -2.5% (from -0.4%) and 5-6% (from 6-7%) for FY21-22;
  • First Resources continues to do more aggressive forward sales with the aim at protecting profit. However, management opined that the recent rally may have been too strong and sudden, resulting in reduced China buying which means prices may need to correct somewhat;
  • First Resources continues to guide for FY20 cash costs of USD210.00- 230.00/tonne, with fertiliser application on track (9M20: 90% applied);
  • First Resources expects the changes in export tax levy structure to go through soon – with talks that for every USD25/tonne increase in CPO price above USD600/tonne, the levy for CPO will rise by USD15/tonne (instead of the previously bandied about USD5/tonne). This will be reviewed every three months. However, the levy for refined products will only rise by USD12/tonne. This would mean that at a CPO price of MYR3,300/tonne, the export tax levy will rise to USD160/tonne (from USD55/tonne currently). This is a significant jump and would mean that pure upstream planters with no downstream capacity would suffer greatly. As the rise in levy for refining margins would be smaller, downstream margins should widen going forward.
  • First Resources understands that the Government is now also thinking of potentially taxing oleochemical exports, in order to bump up the biodiesel fund. First Resources is at an advantage here, as it is now channelling all its exports to its refined products, which would allow it to take advantage of the lower tax levy. First Resources has a refining capacity of 850,000 tonnes, enabling it to process all the CPO it produces (FY20 est.: 790k).

BUY maintained.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-16
SGX Stock Analyst Report BUY MAINTAIN BUY 1.450 SAME 1.450