First Resources - CGS-CIMB Research 2021-08-16: 1H21 Results Hit By Higher Export Levy

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 1H21 Results Hit By Higher Export Levy

First Resources’s 1H21 core net profit fell 46% y-o-y and was below estimates due to lower-than-expected CPO price achieved, higher tax and lower minority interests.
First Resources will be able to enjoy the current high CPO prices and lower export levy in 2H21 as most of its 2H production is unhedged.
Reiterate ADD with a lower target price of S$1.67/share. Risk-reward appears attractive at current EV/ha (US$10.4k) and 14.5x FY21 P/E.

First Resources (SGX:EB5) posted a 46% y-o-y decline in 1HFY21 core net profit (excludes fv changes in biological assets and forex gains) to US$23m despite registering a 48% y-o-y increase in sales. The 1H net profit formed 19% of our and 16% of Bloomberg consensus full-year forecasts. The weaker earnings were due to higher effective tax rate and minority interests.
The low 1H21 earnings bucked the trend of higher CPO prices due mainly to forward sales locked in earlier by First Resources that resulted in lower average CPO price achieved. On top of this, First Resources was exposed to higher export tax and the sharply higher palm oil export levy structure in Indonesia introduced in Dec 20, lifting costs.
On a sequential basis, First Resources's 2Q21 reported net profit was higher at US$24m vs US$9m in 1Q21.
An interim dividend of S$0.0125 was declared by First Resources, representing 49% of its 1H net profit.

FFB output from its nucleus estates grew by 10% in 1H21, driven by recovering FFB yields from the drought in 2019 and 2020. This is better than the group’s guidance for flat to 5% growth in output for 2021F. This, coupled with palm products’ higher selling prices, led First Resources to record a 48% y-o-y increase in revenue.
However, EBITDA margin fell 15% points to 25% in 1H21 as the export levy and taxes for CPO in Indonesia rose to average US$367/tonne in 1H21 vs US$54.3/tonne in 1H20, raising First Resources’s sales and distribution expenses by 243%.
The average CPO price achieved of US$459/tonne (- 17% y-o-y) for 1H21 for its upstream division is lower than average domestic CPO prices in Indonesia of around US$697/tonne. We estimate it likely locked in around 70% of its 1H21 production at around US$750 per tonne and export tax levy of US$55 per tonne in 2H20 before the levy was raised in Dec.

We expect First Resources to post stronger 2H21F earnings as it has not hedged forward a significant portion of its 2H21F production volumes. In 2H20, First Resources achieved an average CPO price of US$533/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$857/tonne and futures CPO price is US$67-100/tonne lower than spot.
On top of this, we project 2H21F FFB output to be 2% higher y-o-y. We cut our FY21-22F forecast for First Resources to reflect higher effective tax rate, changes in CPO price and FFB yields. This reduces our target price for First Resources to S$1.67, still based on an average P/E of 16x (historical 3-year average P/E).
See
Re-rating catalysts are better CPO price/dividends while key downside risks are ESG concerns.

Ivy NG Lee Fang CFA CGS-CIMB Research | Nagulan RAVI CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-16

SGX Stock Analyst Report ADD MAINTAIN ADD 1.67 DOWN 1.690