First Resources - UOB Kay Hian 2022-05-17: 1Q22 Results Slightly Above Expectations

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FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - 1Q22 Results Slightly Above Expectations

• First Resources’s 1Q22 results came in slightly above expectations mainly due to strong ASP despite lower q-o-q sales volume. We expect 2Q22 earnings to be lower q-o-q, dragged by the impact from Indonesia’s export ban which resulted in lower CPO ASP, refining margins and sales volume.
• We have revised our earnings forecasts, factoring in higher CPO ASP assumptions but slightly muted by higher export duties and levies and lower downstream margins. Downgrade First Resources to HOLD with a higher target price of S$2.30.

First Resources' 1Q22 results above expectations.

• First Resources (SGX:EB5) reported 1Q22 net profit of US$73.6m (+738.5% y-o-y), on the back of a 54.1% y-o-y increase in sales to US$303.5m. Results came in slightly higher than our expectations mainly supported by strong ASP, especially from palm kernel despite lower q-o-q sales volume.
• Lower q-o-q results were due to the impact from domestic market obligation (DMO) which has slowed the exports sales and lowered ASP due to the commitment to domestic price obligation (DPO). As a result of lower sales volumes, 1Q22 recorded a net inventory build-up of 31,000 tonnes despite lower production.
• We expect 2Q22 earnings to be lower q-o-q, mainly due to:
  1. Lower CPO ASP and sales volume, dragged by the Indonesia export bans. Since the announcement, Indonesian domestic CPO prices have dropped 20-25%. First Resources had guided that delivery have been paused/rescheduled but does not expect to incur any significant holding cost. With the assumption that the export ban would not last long, First Resources has put most of its delivery on hold where its storage tank can still sustain for another 1-2 months.
  2. Lower total FFB processed. The fresh fruit bunch (FFB) prices from external smallholders have fallen around 50-75% where most of the Indonesian players are trying to keep their storage tank capacity for their internal FFB usage.

Downstream margin may be squeezed.

• As export sales have been halted for the time being and coupled with the limited storage capacity, refining operation would have to be reduced which would result in a low utilisation rate and lower downstream margin. Even though First Resources would be able to convert some of its CPO into other items that can be exported (eg stearin and palm fatty acid distillate), we reckon that the sales volume would be small.

Impact from exports ban is affecting cash flow if sales continue to be held up due to the ban.

• As mentioned, local sales are slow while the exports market is temporarily closed, which means short-term cashflow could be affected for most of the palm players in Indonesia. First Resources is in a better position, ie still being able to generate operating cashflow from the sales of biodiesel (25% of its CPO production) to fulfill the local mandate and export the balance of the palm products that are not subjected to the ban (approximately 20% of the palm value chain).

Secured 60-70% of its 2022 fertiliser.

• First Resources had procured 60-70% fertiliser for 2022, where there would be another tender in Jun 22. The fertiliser prices that First Resources had locked in have increased about 60% y-o-y, whereas the upcoming tender prices are expected to increase further.
• Despite First Resources securing its fertiliser, there are still some delays in its fertiliser delivery in 1Q22, where we believe that it was mainly due to logistic issues.

Revised earnings forecasts.

• We had revised up our earnings forecasts for First Resources by 10%/25% for 2022/23, factoring in:
  • higher CPO assumptions of RM5,200/tonne and RM4,000/tonne respectively (previous: RM4,200/tonne and RM3,000/tonne),
  • higher export levy and duty, and
  • lower downstream utilisation rate.
• Our net profit forecasts for 2022-24 are at US$247m, US$229m and US$231m respectively.
• Downgrade First Resources to HOLD despite a higher target price of S$2.30 (previous: S$2.10) where we reckon that the current share price have already factored in the stronger y-o-y CPO prices for 2022. With the uncertainty from Indonesian policies and the impact from the current export bans, we had downgraded First Resources from BUY to HOLD.
• See
  • First Resources's Share Price,
  • First Resources's Target Price,
  • First Resources's Analyst Reports,
  • First Resources's Dividend History,
  • First Resources's Announcements,
  • First Resources's Latest News.
• Catalysts:
  • Stronger-than-expected CPO price recovery.
  • Higher-than-expected FFB and CPO production.
  • Changes in Indonesia’s policy.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2022-05-17

SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.30 UP 2.100