• First Resources (SGX:EB5)’s 4Q19 earnings are estimated at US$32m-35m, supported by higher sales volume and better selling prices. We expect higher sales volume on the back of higher inventory drawdown before the exports levy came into effect on 1 Jan 20. Downstream operations are expected to have remained stable.
• First Resources share price has dropped by 10% from the recent high and we reckon that it is the right time to accumulate before earnings start to reflect the high CPO prices.
• Maintain BUY. Target Price SGD2.10.

What’s New

4Q19 results preview.

• First Resources is scheduled to announce its 4Q19 results on 26 Feb 20 before the market opens. For 4Q19, we are expecting a core net profit of around US$32m-35m (vs 3Q19: US$29m; 4Q18: US$20m). The better q-o-q and y-o-y performance was mainly due to the higher sales volume and better selling prices for CPO and PK.
• We are expecting a higher sales volume on the back of higher inventory drawdown (carried forward from 3Q19) with strong demand as producers try to avoid paying the export levy in Jan 20 (US$0 in Dec 19 vs US$50/tonne in Jan 20).

4Q19 production slightly below expectation.

• First Resources’s total FFB production for 4Q19 came in at 894,048 tonnes (-11.7% q-o-q, +2.9% y-o-y). For 2019, total FFB production was 3.36m tonnes, down by 2.1% y-o-y. This is slightly below our expectation and we reckon that the 2% y-o-y drop was mainly due to the dry weather in 3Q19 and the older estates in Riau region. However, 2019 CPO production declined by only 1.4% y-o-y vs FFB’s -2% y-o-y as OER for 2019 was higher at 23.1% vs 22.9% in 2018.
• We had factored in about 3% y-o-y FFB production growth for 2020 as we expect faster yield recovery from the younger age profile estates in Kalimantan (~30% of total production) as well as higher FFB yield as trees move to its prime production age of 7-10 years old.

Downstream operations.

• We expect the downstream operations’ margin for 4Q19 to remain relatively good, partially supported by the biodiesel 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. However, there will still be exports of biodiesel to EU in 4Q19, where the contracts had been locked in earlier, thus resulting in a higher margin as compared with Indonesian mandated biodiesel.
• We understand that the Indonesian Ministry of Energy and Natural Resources had reallocated First Resources’s biodiesel delivery port from Pontianak to Padang. With this, First Resources would be able to have better logistics planning and inventory management along with the B30 mandated biodiesel programme

Stock Impact

Fully utilised biodiesel operation.

• Biodiesel margin may be lower in 2020. First Resources used to export about 40% of its total biodiesel to the EU, which has better margins. However, with the B30 biodiesel mandate from the Indonesia government, biodiesel capacity will be fully utilised to produce biodiesel meant for domestic use. The total B30 biodiesel mandated allocation for First Resources in 2020 is 283,281kl (+64.8%yoy) vs its total capacity of 300,000 mt per year.

Fertiliser application.

• Fertiliser application had slowed down in 2H19 mainly due to the dry weather prolonging into Oct 19. However, First Resources’s fertiliser application had already reached about 60% in 1H19. This is unlikely to have any significant impact on oil yield as First Resources is consistently applying the required fertiliser.

FFB production could be better.

• Despite 4Q19 FFB production growth dropping by 11% q-o-q (mainly contributed by the smallholders), we note that First Resources’s internal FFB production had only dropped by 9.7% q-o-q as compared with 3Q18’s -11.6% q-o-q. We reckon this is due to their younger age estates in Kalimantan, which contributed about ~38% of total planted areas and 30% of total production.
• Production contribution will increase year by year as Riau estates are undergoing replanting, while Kalimantan estates are moving into prime production age. Note that First Resources’s 3Q19 production is the highest in the company’s history, and hence 4Q19 FFB production is still at a relatively high level.

Earnings Revision / Risk

Adjusted net profit forecasts for 2019-21.

• We have adjusted our earnings forecast by 3- 5% due to lower-than-expected FFB production growth for 2019 and some house-keeping. Our revised net profit forecasts for 2019-21 stand at US$90.6m, US$ 156.0m and US$165.1m respectively.

Valuation / Recommendation

Maintain BUY with target price of S$2.10.

• We value First Resources based on 15x 2020F PE. We like First Resources for its good track record of delivering a better-than-peers’ performance, and First Resources is also highly leveraged to CPO prices.

Time to accumulate.

• First Resources share price has dropped by about 10% since the recent high at S$1.91 on 10 Jan 20 mainly due to the sell-down in CPO. We reckon that this may be a buying opportunity as First Resources is currently trading at about 12x PE (mean PE: 15x) and we expect the share price to rebound higher on the back of better earnings.

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%.

Source: UOB Kay Hian Research - 6 Feb 2020