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

FIRST RESOURCES LIMITED (SGX:EB5) | SGinvestors.io 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 2H20 RESULTS


Results below expectations.

  • 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.

2H20 earnings remain healthy with higher h-o-h growth from both upstream and downstream operations.

  • 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.


STOCK IMPACT


Lower-than-expected production and sales volume for 2020.

  • 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.

FFB production guidance for 2021.

  • 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.

Forward sold meaningful amount of its 1H21 production in late-20 at a lower-than-current market price.

  • 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

  • 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.


EARNINGS REVISION/RISK



Lower earnings forecasts.

  • 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.

VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • 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



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