• Maintain NEUTRAL with a higher Target Price of SGD1.60, from SGD1.45, 7% downside, derived from 2019F P/E of 13x, which is in line with its regional peers.
• Our preferred pick for a Singapore plantation stock is Wilmar International.

FY18 Core Net Profit Was Below Expectations

• FIRST RESOURCES LIMITED (SGX:EB5)'s FY18 core net profit was below expectations, comprising 81-85% of our and consensus FY18 earnings.
• The main difference was a lower CPO price achieved of USD540/tonne (versus our USD560/tonne projection) and a build-up of 69,000 tonnes of CPO inventory in FY18 (vs a drawdown of 28,000 tonnes in FY17). If we assume these 69,000 tonnes of CPO were sold in 4Q18 at the same achieved selling price of USD493/tonne, FY18 earnings would have made up 93-95% of consensus and our FY18 earnings forecasts.

Briefing Highlights

• FFB output grew 14% y-o-y in FY18, higher than our forecasted 13.4%, but slightly lower than management’s guidance of 15%. Management is targeting 5-10% growth for FY19, which is in line with our assumptions.
• Cash cost was at USD237/tonne in FY18 (+9% y-o-y), stemming from heavier infrastructure expenditures incurred at its Kalimantan Estates which are becoming mature. Going into FY19, management expects cash costs to come back down to USD200-220/tonne coming from higher operational efficiencies. We adjust our cost projections accordingly.
• Downstream margins improved in 4Q18 to 4.7% (from 2.7% in 3Q18), although FY18 margins were still lower at 2.8% (vs 3.1% in FY17). Management is expecting margins to remain stable in FY19, on the back of relatively stable feedstock prices.
• First Resources’ biodiesel allocation for 2019 is around 150,000 tonnes, which is based on a B20 mandate. This local demand comprises 60% of First Resources’s capacity, while around 30% is taken up by export sales currently. Based on the pricing structure for biodiesel in Indonesia, biodiesel players are not making much margin selling biodiesel locally, with the bulk of the margin made by export sales (given the current USD spread of USD100-120/tonne). Should Indonesia move up to a B30 mandate in 2020, biodiesel players would be running at 90% utilisation from local demand alone, which means profitability would be lower, given the lack of export sales.

We Tweak Our FY19-20 Forecasts Upward

• We tweak our FY19-20 forecasts upward by 4-11%, after taking into account lower unit cost assumptions. We introduce FY21 forecasts.
• Our Target Price is raised to SGD1.60, from SGD1.45, based on 13x 2019F P/E. This implies an EV/ha of USD13,500, in line with its peers’ range of USD10,000- 15,000.
• While we like First Resources for its good age profile and efficient operations, we believe valuations are fair at 14x FY19 - the high end of its historical and peer range of 12-14x. We maintain our NEUTRAL call.
• Our preferred pick for a Singapore plantation stock is WILMAR INTERNATIONAL LIMITED (SGX:F34).

Source: RHB Invest Research - 04 Mar 2019