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Morningstar | First Resources’ Robust 3Q Production Volumes Offset by Weaker Selling Prices and Inventory Build-up. See Updated Analyst Note from 12 Nov 2018

No-moat First Resources’ 2018 third-quarter net profit of USD 39 million was up 22% year over year and 9% quarter over quarter, mainly attributable to higher sales volume. However, cumulative nine-month earnings of SGD 102.7 million was flat year over year, slightly below our expectation on the back of a drop in average selling price for crude palm oil, or CPO, and inventory build-up. After fine-tuning our valuation model, we keep our fair value estimate of SGD 1.76. We think there is limited upside for the firm’s share price in the near term due to the lack of catalysts.

Third-quarter EBITDA for the plantations and palm oil mills segment was up only 3% year over year, as higher production volume was offset by weaker average CPO selling price, which fell 9% year over year. The firm's CPO production volume increased by 25% year over year in the third quarter, benefiting from a recovery in fresh fruit bunches, or FFB, yield and a growing mature hectarage of palm oil trees. However, overall sales volume was affected by a net inventory build-up of 17,000 tons. In particular, there was a net inventory build-up of 38,000 tons in the first nine months of 2018 versus a drawdown of 14,000 tons during the same period last year. Management guided that the build-up is largely due to timing issues and expects an improvement in the fourth quarter. This should help to mitigate the impact of a normalized FFB production in the fourth quarter. The firm expects CPO prices to remain volatile due to concerns on the U.S.-China trade tensions and changing import and export tax structures in consuming and producing countries. That said, in the longer term, we think higher biodiesel demand from Indonesia and Malaysia will be supportive of CPO prices, especially given that palm-based biodiesel is becoming more economically viable.

Meanwhile, the refinery and processing segment reported EBITDA of USD 4.5 million in the third quarter, up 58% year over year but dropped 31% quarter over quarter. We think earnings for this segment will remain bumpy, but we keep our long-term EBITDA margin forecast unchanged at 2.5%. In our view, 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.