First Resources - UOB Kay Hian 2021-03-01: 2H20 Results Below Expectations On Lower Production & Sales Volume

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 2H20 Results Below Expectations On Lower Production & Sales Volume

First Resources’s 2H20 net profit came below expectations due to lower-than-expected production and sales volume.
We cut the 2021 net profit forecast by 8% after lowered its potential realised ASP for 2021 as it forward sold a meaningful volume for 1H21 before the price spike. With the adjustment we still expect earnings y-o-y growth of 50% supported by a higher ASP and sales volume.
First Resources has raised its dividend payout policy to 50% from 30%. Maintain BUY with a lower target price of S$1.70.

First Resources (SGX:EB5) reported core net profit of US$53.8m (+25% h-o-h, -10% y-o-y) and US$112.0m (+26% y-o-y) for 2H20 and 2020 respectively. The variances came from:
1. lower-than-expected internal production in 2H20;
2. lower sales volume which saw an inventory build-up at end Dec 20 vs an inventory drawdown at end- Dec 19.
The inventory build-up in Dec 20 took place as the movement of CPO got difficult with high rainfall and flooding in East Kalimantan. We expect the build-up in inventory to deliver in 1Q21.

This is mainly supported by higher sales volume and better margins. First Resources’s realised selling prices in 2H20 were slightly below our expectations and we reckon that this was mainly due to the timing of its product delivery which would materialise in 1H21.

Total FFB production from nucleus areas came in lower than expected, down by 3.5% y-o-y vs our expectations of - 1.2%. This may be due to the heavy rainfall towards end-20 that delayed and disrupted harvesting.
Further, sales volumes in 2020 were also impacted by a net inventory build-up of ~44,000 tonnes (2019: drawdown of ~53,000 tonnes).
For 2H20, there was a net inventory build-up of ~25,000 tonnes vs 2H19: drawdown of ~5,000 tonnes. This build-up of inventory was due to logistics issues because of which most of the inventory was stuck in its Kalimantan mills.

First Resources's management guided FFB production growth at 0-5% y-o-y for 2021 supported by a production recovery and higher yield. The management had said that they observed a y-o-y production growth in Jan- Feb 21 but we reckon that production in 1Q21 may not be as good due to the disruption caused by recent heavy rainfall.
We had factored in a 4% FFB production y-o-y growth with the weather forecast indicating fewer droughts in 2021 boding well for a good recovery in 2H21.

First Resources forward sold its 1H21 production before the CPO price started to appreciate in the last few months of 2020. This potentially translated to a lower-than-expected realised price for 1H21 vs the current market price, as committed prices were lower and did not include the current high export levy and duty. This will lead to a lower net selling price as compared with the spot price especially for 1H21.
We still expect First Resources's upstream operating earnings to increase by ~40% in 2021 on the back of:
1. higher sale volume which includes the carry forward sales from 4Q20;
2. better production growth in 2021; and
3. higher y-o-y net selling prices.

Downstream margin weaker for 2021 mainly dragged by lower biodiesel margins. However, this would be partially mitigated by higher biodiesel demand with better traffic in 2021, and also stable margins from its other refined products benefitting from the Indonesia export levy structure.

We have lowered our First Resources's net profit forecasts for 2021-22 by 8-10% downwards, factoring in forward sales at lower selling prices and reduced our aggressive FFB yield assumption. This brings our net profit forecasts for 2021-23 to US$154m, US$134m and US$144m respectively.

Maintain BUY on First Resources and lower target price to S$1.70 (previous: S$1.85), pegged at 12x 2021F P/E, 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.
The proposed final dividend of 2 cents, bringing First Resources's total dividend for 2020 to 3 cents. This would translate to a dividend yield of 21%.
First Resources has raised dividend policy going forward to 50% (previous: 30%) of its underlying net profit annually.
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 contributions, 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/ 2021-03-01

SGX Stock Analyst Report BUY MAINTAIN BUY 1.70 DOWN 1.850