Morningstar | Higher Sales Volumes in 2Q Offset by Lower Selling Prices; Lowering First Resources’ FVE to SGD 1.76. See Updated Analyst Note from 14 Aug 2018
No-moat First Resources reported a decent 2018 second-quarter net profit of USD 35.9 million, up 55% year over year and 30% quarter over quarter, on the back of higher sales volume. However, first-half results (down 11% year over year) were below our expectation mainly attributable to lower average selling price for crude palm oil, or CPO, and inventory build-up. After updating our valuation model to account for the lower CPO prices, we cut our fair value estimate to SGD 1.76 from SGD 1.86, and we think the firm is currently fairly valued.The company's CPO production volume increased by 36% year over year in the second quarter, underpinned by higher fresh fruit bunches production on the back of yield recovery and higher mature hectarage. Nevertheless, overall sales volume in the first half still trailed the strong production growth despite a net inventory drawdown of 16,000 tons in second quarter. In first half, there was a net inventory build-up of 21,000 tons compared with drawdown of 47,000 tons, a year ago.
On the other hand, while average CPO selling price fell 9% year over year in second quarter, EBITDA for the plantations and palm oil mills segment was up 13% year over year on the back of higher sales volume. We expect rising production due to continued improvements in yield and contribution from newly mature hectarage will continue to support earnings going forward despite the weak CPO prices. In the longer term, we think higher biodiesel demand from Indonesia and Malaysia will be a catalyst for firmer CPO prices.
Meanwhile, the refinery and processing segment ported EBITDA of USD 6.6 million in second quarter, a sharp improvement from loss of USD 0.7 million in previous quarter, mainly due to higher refining margins achieved and increased sales volume. That said, earnings for this segment are volatile and we keep our 2018 margin forecast unchanged at 2.5%.
First Resources is an investment holding company. Through its subsidiaries, Co. is engaged in oil palm plantation, palm oil refining and palm kernel crushing, marketing and distribution of palm oil products, investment holding, oil palm seed breeding, aircraft ownership and management, and rubber plantation. Co. and its subsidiaries have two reportable segments: Plantations and Palm Oil Mills, which is involved in the cultivation and maintenance of oil palm plantations and operation of palm oil mills; and Refinery and Processing, which markets and sells processed palm based products produced from the refinery, fractionation and biodiesel plants and other downstream processing facilities.
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