EUR 850.00 For Business Accounts Only

Morningstar | First Resources’ 2018 Results Trail Expectations on Inventory Buildup; Shares Fairly Valued

No-moat First Resources’ 2018 net profit of USD 120 million, down 13% year over year, was below our expectations, largely attributable to lower average selling prices and a net inventory buildup. After fine-tuning our valuation model, we are cutting our fair value estimate to SGD 1.74 from SGD 1.76. We think the firm is currently fairly valued, with share prices supported by firmer crude palm oil, or CPO, prices going forward.

While EBITDA for the upstream segment was down 8% year over year to USD 250 million because of inventory buildup and depressed CPO prices, this was partly mitigated by improved production volumes and yields. In particular, fresh fruit bunches harvested and CPO production volumes increased by 13% and 17%, respectively, on the back of yield recovery and contribution from newly mature estates. We understand that the inventory buildup is mainly due to logistic issues and should be sold in 2019. In addition, CPO prices have started to rebound on the back of seasonally weaker output. Management’s guidance suggests that demand should be supported by the extension of Indonesia’s biodiesel mandate and favorable changes to the import and export tax structures. However, they cautioned that prices will be affected by macro developments, such as the U.S.-China trade tension, and supply-demand dynamics of other competing edible oils. In our view, earnings from this segment will continue to be underpinned by robust production growth, albeit slower than in 2018. Meanwhile, CPO prices may rise more than expected, given the potential occurrence of El Niño in the first half of 2019.

EBITDA for the refinery and processing segment was also down 9% year over year to USD 17 million, mainly due to lower refining margins. Earnings from this segment are volatile, and we are forecasting an average EBITDA margin of 2.8% over our five-year explicit forecast period, comparable to margins achieved in 2017-18.

We think First Resources will remain an upstream play for investors, given the relative size of its refining segment (less than 10% of the firm’s total EBITDA) versus its plantation operations. Management also said that it expects 2019 capital expenditures will increase roughly 30% year over year to USD 100 million, mainly due to enhancement of infrastructure in plantations as well as construction of new CPO mills. We think funding will not be a concern, as the firm’s net gearing ratio remains healthy at 0.3 times as of the end of 2018.