High Inventory = Spill Over Into Profits in FY19?

• FIRST RESOURCES LIMITED (SGX:EB5)'s FY18 results came in within our expectations but below streets, mainly due to net inventory build-up of ~28,000 tonnes in 4Q18.
• For FY19, we expect earnings growth of 14% driven by higher output and CPO prices. Following our earnings tweak, we reiterate our bcall with a revised Target Price of SGD2.03 (-3%) on unchanged 17x PER peg, its 5-year mean.
• We continue to like First Resources for its medium-term growth prospect, cost efficiency.

Weaker Earnings on Inventory Build-up & Low Prices

• Stripping aside Fair Value loss on biological assets (USD3m), FY18’s core PATMI of USD123m (-12% y-o-y) met 96%/94% of our (in-line)/ consensus (below) expectations.
• Lower earnings were mainly due to weaker upstream earnings led by softer CPO ASP of USD540/t (-10% y-o-y) and inventory build-up of ~69,000 tonnes during the year (FY17: drawdown of ~28,000 tonnes). This was somewhat mitigated by double-digit FFB output growth. Its downstream EBITDA was also lower by 9% y-o-y to USD17m, translating to EBITDA margin of USD17/t (-19% y-o-y).

Still An Efficient Producer, at Low Cost

• Operationally, FY18’s FFB output rose 14% y-o-y to 3.06m MT while CPO yield grew by 5% to 4.1t/ha. First Resources remains one of the lowest cost producers in the region with its FY18 unit cash cost of production at USD237/t (+9% y-o-y). By our estimate, its all-in cost of production is ~USD300 per CPO tonne (+8% y-o-y).

Expecting a +14% Growth in FY19 Earnings

• Following the results, we have tweaked our financial parameters which led to -2%/-1% change in our FY19-20 PATMI forecasts and we also introduce our FY21 forecast. FY19E’s EPS growth of +14% will be mainly driven by our expected +9% y-o-y rebound growth in FFB output. We are keeping our FY19 net CPO ASP unchanged at USD553/t (+2% y-o-y).
• Risks to our forecasts include CPO price volatility and weather anomalies impacting output.
• A final DPS of 2.0 Singapore cents per share was proposed, bringing FY18’s total DPS to 3.25 cents.

Source: Maybank Kim Eng Research - 01 Mar 2019