• Keep BUY and SGD1.95 Target Price, 10% upside, derived from 18x 2020F P/E.
• We continue to like FIRST RESOURCES (SGX:EB5) for its almost pure upstream operations, which are highly leveraged to CPO prices, as well as its cost-efficient operations. Further upside could come from its booming biodiesel industry exposure, which is growing with the Indonesian Government’s biodiesel mandate.

We Expect First Resources to Continue Benefiting From the Rise in CPO Prices

• We expect First Resources to continue benefiting from the rise in CPO prices, given its majority upstream operations that comprise 85-95% of earnings. Every MYR100.00/tonne change in CPO price will affect its earnings by 6-8%.
• YTD- 9M19, First Resources has achieved an average CPO price of USD467.00/tonne. We project the bulk of its earnings growth projection of 56% y-o-y for FY20 to come from our higher CPO price projections of USD544.00/tonne in FY20, as well as elevated FFB growth.

For FY19, Management Is Expecting FFB Growth to be Flat YoY

• However, for FY20-21, we project FFB growth of 6-10% y-o-y. While the weather has normalised at its estates, the impact of the three months of dry weather could be seen in 1H20, although this will be offset somewhat by 5,000ha of new areas coming into maturity next year.

Unit Costs Are Expected to Remain Low

• Unit costs are expected to remain low, at USD220.00/tonne in FY19. We expect a 5-7% rise in costs on a y-o-y basis for FY20-21, coming from a minimum wage hike and higher fertiliser prices.

FR’s Downstream Margins Are Improving

• It stood at 4.3% in 3Q19 from 2.2% in 2Q19 (3Q18: 2.7%). This was from improved margins for both the refinery and biodiesel segments. Despite the EU import tax on Indonesian biodiesel, it managed to continue running its biodiesel capacity at 100% in 3Q19.
• For 4Q19, management is guiding for margins to be sustained at 3Q19 levels – refinery margins should also be sustainable. For FY20-21, we are projecting downstream margins at 4-5% pa.
• First Resources has received a biodiesel allocation of 280k kilolitres (+63% y-o-y) for FY20 from 2019’s allocation of 172k kilolitres – this is based on Indonesia’s B30 mandate. This implies that all its biodiesel capacity will be for domestic use. Given that export margins are also healthier than local margins; this could reduce FY20 biodiesel margins slightly.
• We make no changes to our forecasts.

Target Price Is Maintained at SGD1.95

• Our Target Price is maintained at SGD1.95, which is based on an unchanged 18x P/E, 1SD above First Resources’ historical average. This implies an EV/ha of USD13,000, in line with peers’ USD10,000-15,000 range.
• The firm’s mostly upstream operations will stand it in good stead in a CPO price upcycle. First Resources will also benefit from higher biodiesel profits, as Indonesia implements its B30 mandate in 2020. We maintain our recommendation on this stock.

Source: RHB Invest Research - 19 Dec 2019