• Downgrade to NEUTRAL from Buy, new Target Price of SGD1.25 from SGD1.20, 4% downside and 2% yield.
• First Resources’s 1Q20 results disappointed on lower FFB output and sales volumes. While production should improve in 2Q20, this will be offset by lower prevailing CPO prices.
• As the First Resources share price has hit our target, we downgrade our recommendation on the stock.

First Resources 1Q20 Net Profit Below Expectations

• First Resources (SGX:EB5) is no longer releasing quarterly results. Based on 1Q20’s abbreviated financial highlights, net profit made up just 20% of our FY20 forecast and 16% of consensus. A key miss was lower-than-expected FFB output, which could have resulted in higher-than-expected unit costs.
• First Resources also had 8,000 tonnes of inventory build-up in 1Q20 vs 17,000 tonnes build-up in 1Q19.

First Resources Briefing Highlights

• 1Q20 FFB production fell 3.9% y-o-y, below First Resourcess original guidance of 0-5% and our projected 2.5% growth for FY20. This was attributed to dry weather at all three of its operating areas in 1Q, although this has since improved in April. First Resources now expects FY20 FFB growth to be on the low end of the 0-5% range. We revise our FFB growth assumptions to 0.4% for FY20 (from 2.5%) and maintain our 6-7% growth for FY21-22;
• First Resources continues to guide for cash cost of USD210-230/tonne for FY20. Fertiliser application is on track, with 30% applied in 1Q20;
• First Resources is reducing its capex target to USD70m (from USD100m) for FY20, as it is delaying its USD100m downstream capacity expansion (600k tonne refining and 250k tonne biodiesel) in East Kalimantan to 2021. Replanting target remains on track at 3,000ha.
• Refineries still running at 100% utilisation in 1Q20, while margins are still relatively good. This should be maintained given lower feedstock prices currently. Significant demand improvement has been seen from China, while India has started buying again in May.
• First Resources expects the B30 mandate to be fulfilled in Indonesia with the help of the hike in export duty and the injection from the Government. In addition to this, First Resources believes there could be a reduction in the pricing structure for biodiesel players from CPO price plus USD100/tonne to USD80/tonne for a three-month period. First Resources expects to still be able to make a comfortable margin with this price reduction, as methanol prices have come down in line with crude oil prices.

Downgrade to NEUTRAL

• Post-adjustment for lower FFB growth and subsequently higher unit costs, we bring down our FY20-22 forecasts by 9- 11%. However, we raise our First Resources target price to SGD1.25 from SGD1.20 based on an updated 14x 2020 P/E (from 12x), in line with its historical average.
• Given the recent First Resources Share Price improvement, we believe valuations are fair currently.

Source: RHB Invest Research - 26 May 2020