• Despite the drawback from the new Indonesia export levy, where First Resources would not enjoy as much of a gain from high prices as compared with its Malaysia peers, we still expect First Resources’ earnings to grow by 16% y-o-y in 2021 with higher ASP, better FFB production and stable downstream margin.
• Reiterate BUY on First Resources with the potential booster coming from rising earnings momentum.
• First Resources has consistently delivered good operational performance that meets expectations.

Better-than-peers’ FFB Production Growth

• We expect First Resources (SGX:EB5)’s 2021 fresh fruit bunch (FFB) production growth to be higher than peers at 5% y-o-y. The higher FFB production would come mainly from:
  • stable production growth from the Riau region; and
  • production recovery at its Kalimantan estates which had suffered due to the unfavourable weather in 2019.
• Further to that, most of First Resources’ Kalimantan estates are moving into prime production age (contributing 38% of total planted area and 29% of total production). First Resources had a total planted acreage of 202,702 hectares (ha) as of end-Jun 20, of which 71% of total planted areas are located in Riau region, 24% in West Kalimantan and 5% in East Kalimantan.

Better ASP

• As CPO price has been above RM3,000/tonne since Oct 20 coupled with better production, we are expecting higher 2021 earnings for First Resources. Based on our 2021 earnings forecast, we are expecting core net profit to increase by 16% y-o-y, buoyed by:
  • higher ASP; and
  • better-than-peers FFB production growth and oil extraction rate.
• For every 10% increase in CPO prices, First Resources’ core net profit will increase by 29%.

Stable Downstream Margin

• Downstream margin is expected to be good in the near term. With the sharp increase in CPO price, the refined palm oil levy is lower than the crude palm oil levy, resulting in a relatively good processing margin.
• On the biodiesel side, management said delivery of the contracted amount by Pertamina is on track with a high realisation rate. First Resources had received 2021 biodiesel allocation of 259,882 kiloliters (kl) which is close to its 2020 allocation of 283,281kl.

Impact From Higher Rainfall Volume

• With La Nina, both Malaysia and Indonesia have experienced high rainfall, with some regions experiencing floods as well. There is higher rainfall volume in Kalimantan as compared to Sumatera.
• Currently, the impact is more of an impediment to harvesting and evacuation, and not so much damaging to crops and infrastructure. This would affect First Resources’ 4Q20-1Q21 FFB production. Having said that, as most of First Resources’ estates are located in the Riau region, we reckon that the impact from higher rainfall volume would be less severe on First Resources’ FFB production than those with higher exposure in Kalimantan.

Share Buyback

• First Resources had embarked on aggressive share buybacks in 2020. Last year, it had bought back 5.92m shares at S$1.20-1.53 for about US$6m, representing only about 5% of its cash holdings.

Maintain Earnings Forecasts, Reiterate BUY with Target Price S$1.85

• First Resources remains one of our top picks for the plantation sector. We expect its 2021 earnings to increase by 16% y-o-y on the back of higher ASP.
• We also like First Resources for its:
  • its young estate profile;
  • better-than-peers’ estate operational performance;
  • lower cost of production; and
  • stable downstream margin.

Catalyst to First Resources Share Price

• 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.
• Higher-than-expected FFB and CPO production.

Source: UOB Kay Hian Research - 2 Feb 2021