Low Output and Price to Kick Off the Year

• FIRST RESOURCES LIMITED (SGX:EB5) is likely to deliver a set of relatively weak 1Q19 results on low output and CPO price, buffered by drawdown of its huge inventory brought forward from 2018.
• Maintaining forecasts for now as we expect stronger output and CPO price in the coming months. We reiterate our BUY call with an unchanged Target Price of SGD2.03 on 17x FY19 PER peg, its 5Y mean.
• We continue to like First Resources for its medium-term growth prospect, cost efficiency.

Crop Trend to Normalise With Stronger 2H Output

• Cropping pattern is likely to normalize in 2019 as 1Q19 FFB output announced last Friday revealed a 7% y-o-y decline to 0.65m MT, in part due to the high base of 1Q18. While 2018’s 1H:2H output ratio was 46:54, 2019’s ratio may revert to historical trends (2011-18: 43:57) as postulated by First Resources during a recent NDR in KL.
• First Resources' 1Q19 FFB output met just 20% of our full-year forecast of 3.33m MT, but within historical trends as Q1 output is seasonally the weakest. Our +9% y-o-y FFB growth forecast is within FR’s 5-10% FFB growth guidance for FY19 (FY18: +14% y-o-y). Growth will be driven by First Resources’ relatively higher percentage of young tree profile, averaging 11 years.
• The weaker y-o-y FFB output is somewhat mitigated by higher OER of 23.4% (1Q18: 22.9%).

Buffered by Huge Inventory Brought Forward

• The impact of lower output in 1Q19 will also be mitigated by anticipated drawdown in inventory during the quarter. Recall that First Resources recorded a net inventory build-up of ~69,000 tonnes in FY18 (FY17: drawdown of ~28,000 tonnes). In 4Q18 alone, there was a net inventory build-up of ~31,000 MT. The build-up is in part due to the delay in biodiesel delivery to Pertamina which was delivered and recognised as sales in 1Q19.

Maintaining Our Earnings Forecasts for Now

• We estimate First Resources will likely report SGD22-27m in 1Q19 net profit (based on industry’s spot CPO ASP achieved of USD491/t), meeting 16-19% of our full-year forecast.
• We are keeping our earnings forecasts for now, expecting stronger quarters ahead. Our FY19 net CPO ASP assumption is presently at USD553/t.

Source: Maybank Kim Eng Research - 6 May 2019