• First Resources is scheduled to release it 3Q19 results on 12 Nov 19. For 3Q19, we are expecting a better quarter q-o-q on the back of better selling prices and higher production volume. We also reckon that sales volume might be higher q-o-q.
• For 3Q19, First Resources’s FFB production increased by 38% q-o-q and 3% y-o-y, still in line with our expectation. Total FFB production for 9M19 is at 70% of our full-year assumption and we are expecting 4Q19 production to be better q-o-q.
• Maintain BUY. Target price: S$1.90.

What’s New

3Q19 results preview.

• FIRST RESOURCES (SGX:EB5) is scheduled to announce its 3Q19 results on 12 Nov 19 before the market opens. See First Resources Announcements.
• For 3Q19, we are expecting a core net profit of around US$35m-38m (vs 2Q19: US$17m; 3Q18: US$39m). The better q-o-q and y-o-y performance was mainly due to the higher production and better selling prices for CPO and PK.
• Average CPO selling prices had increased by 2.2% q-o-q to US$481/tonne. We are expecting sales volume to be higher from 2Q19 on strong demand.

3Q19 production came in within expectation.

• Total FFB production for 3Q19 came in at 1.0m tonnes (+38.4% q-o-q, +3.0% y-o-y). For 9M19, total FFB production was 2.47m tonnes or down by 3.9% y-o-y, where we reckon that this was mainly due to yield stress after the strong recovery since 2H17. 9M19 total FFB production is within our expectation which contributed 70% of our full-year assumption. The peak season is most likely to come in 4Q19 due to the dry season.
• We still maintain our FFB production at a low single digit growth with its older age trees with an average age of 16-17 years in the Riau estates (group’s average age: 12 years) which contributed close to 70% of group production.

Downstream operation.

• Recall that management had guided that biodiesel exports to the EU would be lower in 2H19, given that the EU had imposed tariffs of 8-18% on biodiesel from Indonesia in Aug 19. First Resources exports about 33% of its biodiesel sales volume to the EU.
• However, the Indonesia Ministry of Energy and Natural Resources had officially announced the biodiesel blending allocation for the B30 biodiesel programme would be kick started in Jan 20 in Oct 19. The total allocation for First Resources is at 283,281kl (+64.8% y-o-y). With this, we reckon that the biodiesel plants would be fully utilised in 2020.

Stock Impact

B30 biodiesel implementation.

• The Indonesian government will implement the B30 biodiesel blending mandate in Jan 20. The Ministry of Energy and Natural Resources had announced the biodiesel blending allocation in Oct 19, with First Resources getting an allocation of 283,281 kl (+64.8% y-o-y).
• With the increasing biodiesel demand in Indonesia, First Resources may increase its biodiesel plant capacity. Its plants are running at about 90% utilisation for the B20 biodiesel blending mandate. Management had guided it would need 18-24 months to build a new biodiesel plant.

Upstream to reclaim position as main contributor.

• With the recent uptrend in CPO prices (+16.1% since Sep 19 to date), we reckon that upstream operations would return to becoming the main contributor to the group’s revenue in 4Q19 and 2020.

Earnings Revision / Risk

Maintain 2019-20 net profit forecasts.

• We maintain our net profit forecasts of US$99.1m, US$146.6m and US$163.3m for 2019-21 respectively.

Valuation / Recommendation

Maintain BUY with a target price of S$1.90.

• We value First Resources based on 15x 2020F PE, or the stock’s 5-year average. We like First Resources for its good track record of delivering better-than-peers’ performance, and First Resources is also highly leveraged to CPO prices.
• With the recent spike in CPO prices of +14.6% since end-October to date, First Resources's share price has also moved up by 9.9%.
• See First Resources Target Price.

Share Price Catalyst

Stronger-than-expected CPO price recovery.

• First Resources’s earnings are still largely dependent on upstream contribution, and higher CPO prices are positive to its earnings. Every 5% increase in CPO ASP would increase First Resources’s net profit by 12-15%. For 1H19, the average CPO price was RM1,996/tonne.
• We are expecting 2H19 CPO price to average RM2,150-2,250, and the year at an average of RM2,100.

Source: UOB Kay Hian Research - 7 Nov 2019