First Resources - CGS-CIMB Research 2021-05-17: Expect Stronger 2021 Despite Weak 1Q21


First Resources - Expect Stronger 2021 Despite Weak 1Q21

  • First Resources’s 1Q21 core net profit fell 61% y-o-y and appears to be below forecasts.
  • It was not able to benefit from rising CPO prices as it has locked in ASP for a meaningful portion of 1H21 crops but was exposed to higher export levy.
  • 2Q earnings are likely to stay weak before rising significantly in 2H21F. Risk-reward appears attractive at current EV/ha (US$10.2k) and 14x P/E.

Forward sales + higher export levy hit 1Q21 earnings

  • First Resources (SGX:EB5) posted a 61% y-o-y decline in 1QFY21 headline net profit to US$9m despite registering a 40% y-o-y increase in sales. This represents the lowest 1Q net profit achievement since 1Q16. The 1Q net profit formed only 7% of our and 5% of Bloomberg consensus full-year forecasts.
  • The weak 1Q earnings bucked the trend of higher CPO prices due mainly to forward sales locked in earlier by First Resources that affected its average CPO price achievement. On top of this, First Resources was exposed to the sharply higher palm oil export levy structure in Indonesia from Dec 20 which led to higher costs.
  • First Resources had said in its 4Q briefing that it has hedged a meaningful portion of its production for 1H21 but did not disclose the forward sales volumes or prices.

Strong recovery in production a positive

  • FFB output from its nucleus estates grew by 11% in 1Q21, driven by recovering FFB yields from the drought in 2019 and 2020. This is higher than the group’s guidance for flat to slightly higher output. This coupled with palm products’ higher selling prices led the group to record a 40% y-o-y increase in revenue. However, EBITDA margin fell 17% points to 21% as the export levy and taxes for CPO in Indonesia rose to average US$332/tonne in 1Q21 vs US$57/tonne in 1Q20, raising First Resources’s sales and distribution expenses.

What to expect in 2Q21F and 2H21F

  • First Resources indicated that it may not be able to fully enjoy the high CPO price in 1H21 due to forward sales contracts entered into earlier. However, it expects stronger 2H21F earnings as it has not hedged forward a significant portion of its 2H21F production volumes.
  • First Resources is also more bullish on the CPO price outlook compared to Feb 21, due to tight soybean oil supplies and rising biodiesel mandates in the US.
  • In 2H20, First Resources achieved an average CPO price of US$533 per tonne and booked a core net profit of US$71m. The current CPO price in Indonesia (net of export tax and levy) is around US$820 per tonne and futures CPO price is around US$100-200 per tonne lower than spot. Assuming 2H21 production is 5% higher y-o-y and flattish costs, we roughly estimate First Resources will be able to meet our earnings forecast if it is able to achieve a CPO price of US$700 per tonne (net of export tax and levy). As such, we retain our net profit forecasts.
  • Despite the 1Q earnings disappointment, we reiterate ADD for First Resources as we see the weak 1H as a temporary setback and expect earnings to track better CPO prices in 2H.
  • See
  • We maintain our target price of S$1.69, still based on an average P/E of 16x (historical 3-year average P/E).
  • Re-rating catalysts are rising CPO prices, lower export levy, and higher production.
  • 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 2021-05-17
SGX Stock Analyst Report ADD MAINTAIN ADD 1.690 SAME 1.690