First Resources - UOB Kay Hian 2020-11-16: 3Q20 Results Within Expectations

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 3Q20 Results Within Expectations

First Resources reported 9M20 net profit of US$80m, or about 60% of our full-year estimate. Earnings are within our expectations as we see a better 4Q20 performance, supported by higher ASP and sales volume.
First Resources’s downstream capacity is about the same as its CPO production, which means First Resources is likely to be less affected by the revision of export levy in Indonesia. The incremental in levy for refined products is smaller than that for crude products.
Maintain BUY. Target price: S$1.75.

First Resources (SGX:EB5) reported net profit of US$80.3m for 9M20, accounting for about 60% of our full-year assumption. Earnings are within our expectations as we see a better 4Q20 performance, supported by higher ASP and sales volume. First Resources also registered the highest q-o-q earnings growth and net margin among peers.

The good earnings were attributed to higher ASP and better sales volume. However, 9M20sales volume still came in lower y-o-y due to lower third-party CPO purchases and a net inventory build-up of 24,000 tonnes (9M19: 16,000 tonnes).

Among peers, First Resources has the highest q-o-q growth of 25% q-o-q each in FFB and CPO production. Most of the peers reported FFB production growth of negative to +15% and CPO production growth of negative to +10% growth. We reckon First Resources’s higher production was due to its better-than-peers oil extraction rate.

We expect better q-o-q earnings for First Resources in 4Q20 on the back of higher ASP and production.
First Resources’s downstream margin would also come in higher than peers in 4Q20. As the government is expected to announce an export levy in Nov-Dec 20, Indonesia plantation companies have started to factor this into their CPO selling prices. First Resources would be able to enjoy a lower export levy for processed palm oil than for crude palm oil and crude palm olein.

First Resources lowered its FFB production growth guidance for 2020 from flat y-o-y to marginally lower after its production slowed down in Oct-Nov 20. The new guidance is in line with our expectations as we had forecasted its FFB production growth at -1% y-o-y.
First Resources's management is also expecting its quarterly FFB production for 2020 to peak in 3Q20, unlike other companies which are expecting their highest quarterly FFB production in 4Q20. This is in line with our channel checks which indicate the Riau region (71% of national production) and West Kalimantan (24%) saw declining m-o-m production in October to 1-10 Nov 20.

Downstream operating margins are expected to be lower in 4Q20 on higher feedstock prices. But First Resources’s downstream margin would come in higher than peers in 4Q20.
On the biodiesel side, management said delivery of the contracted amount by Pertamina is on track with a high realisation rate. Biodiesel players are still waiting for the 2021 biodiesel allocation. As the economic recovery is expected to improve in 2H21, biodiesel usage would be better in 2H21 and this will translate into higher biodiesel consumption.

First Resources has embarked on aggressive share buyback recently. To date, it had bought back 5.92m shares at S$1.20-1.53 for about US$6m, representing only about 5% of its cash holdings.

We maintain our First Resources's net profit forecast at US$143.8m for 2020. We raise First Resources's 2021-22 net profit forecasts by 5% and 8% to US$156.9m and US$157.5m respectively, factoring in higher CPO assumption of RM2,600/tonne (from Rm2,350/tonne) and higher operating expenses.

Maintain BUY on First Resources and target price of S$1.75, pegged at 12x 2021F PE, or 1SD below the stock’s 5-year average mean of 15x.
First Resources remains one of our top picks in the plantation sector. We like 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.
Catalyst to First Resources share price:
- 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.
- Higher-than-expected FFB and CPO production.

Jacquelyn Yow Hui Li UOB Kay Hian Research | Leow Huey Chuen UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-16

SGX Stock Analyst Report BUY MAINTAIN BUY 1.75 UP 1.650