SINGAPORE (Nov 13): Analysts of three research houses are keeping First Resources at “buy” on robust 3Q18 performance, strong output numbers and attractive valuations.

First Resources’ 3Q18 earnings rose 22% y-o-y to US$39 million, largely in line with consensus. The robust performance was driven by stronger than expected profitability even though the crude palm oil (CPO) price environment remains challenging.

The weakening IDR currency trend against the US dollar also supported overall profitability performance in the quarter. Revenue rose 25% y-o-y to US$171 million in line with consensus forecast.

CPO average selling price (ASP) reached US$526 per MT, down 9% y-o-y, while CPO sales volume rose 28% y-o-y to 241,000 MT, mainly driven by strong output performance.

DBS Group Research says First Resources’ young trees will continue to boost its CPO yield and drive CPO volume growth. This should result in strong earnings growth momentum ahead. First Resources’ aggressive planting in East and West Kalimantan between FY12 and FY14 should also contribute to the group’s strong volume and earnings growth in FY19F.

“We believe consistent earnings delivery should move First Resources’ stock price higher. Moreover, a more stable CPO price outlook will mean that First Resources’ earnings growth will be driven by volume and CPO yield expansion,” says lead analyst William Simadiputra of DBS which has a “buy” with an unchanged target price of $1.97.

Meanwhile, Maybank KimEng says First Resources’ FFB (fresh fruit bunches) nucleus output growth rate remained strong, fuelled by a high percentage of young trees entering prime maturity.

First Resources posted its third straight quarter of double-digit y-o-y growth. 9M18 FFB nucleus output of 2.29 million MT was up 20% y-o-y. This makes up 75% of Maybank’s full-year forecast and places it on track to meet its full-year forecast of 3.04 million MT.

“We like First Resources for its medium-term growth prospects and cost efficiency, with it being one of the lowest cost producers in the region,” says analyst Ong Chee Ting of Maybank which has a “buy” and target price of $2.00.

From First Resources’ 9M18 results teleconference, CGS-CIMB Securities says FY18 FFB output from its nucleus estates is expected to grow by 15% while cost of production guidance is maintained at US$220/tonne for 2018 and new planting/replanting target is kept at 2,000 ha/800 ha.

Some plantations have reported they were not able to transport CPO from their estates to refineries due to a shortage of barges, leading to higher than usual palm oil inventory at some estates in Kalimantan. First Resources says it is not impacted by logistics issues as the group derived 73% of its output from Riau, 23% from East Kalimantan and only 4% from East Kalimantan in 9M18.

In addition, CGS-CIMB says rising interest rates in Indonesia will not impact First Resources’ borrowing costs as these are mostly in US$. First Resources’ US$ loans are also predominantly on fixed interest rates with average borrowing costs of 3-4%. As for the weaker Rupiah, it will lower some of its operating costs which are denominated in Rupiah, in US$ terms.

“Maintain ‘add’ and target price of $2.08 or historical 15x forward earnings,” says analyst Ivy Ng Lee Fang of CGS-CIMB.

Taking a contrarian view is RHB Research which is maintaining its “neutral” with unchanged target price of $1.60 based 11 times 2019F earnings, which is in line with its regional peers. However, due to an inventory build-up of 38,000 tonnes of CPO, First Resources’ 9M18 results seemed lower than expected.

“We maintain our forecasts for now, pending more information from the analyst briefing later... Our preferred pick for a Singapore plantation stock is Wilmar,” says RHB.

Year to date, shares in First Resources are down 16.4% to $1.58.

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