SINGAPORE (Nov 14): Analyst remain sanguine on First Resources, despite the palm oil producer posting a set of results for 3Q19 that looked fairly dismal – on the surface at least.

While First Resources registered declines across several key financial metrics during the quarter, market watchers are quick to note that the latest set of results has still exceeded expectations. And the analysts believe the group is well on track to achieve full year estimates. 

First Resources saw its earnings for the quarter fall 28.5% to US$27.9 million ($38.0 million), from US$39.0 million a year ago. Sales for the quarter came in 19.7% lower y-o-y at US$137.6 million. 

The plunge in sales was attributable mainly to lower contributions across all segments including plantations and palm oil mills, refinery and processing and inter-segment elimination which posted y-o-y declines of 18.5%, 21.5% and 20.4% respectively. All the segments also saw lower average selling prices. 

As a result, gross profit slipped 23.9% to US$63.5 million in 3Q19, mainly driven by the lower average selling prices.

Despite the stumble in 3Q19, First Resources says it is gearing up in production is a sign of preparation for 4Q19 – the group’s peak production quarter.

See: First Resources posts 28.5% drop in 3Q earnings to $38 mil

For a start, analysts opine that the group’s organic growth prospects are likely to pave the way for stronger earnings growth. In a Tuesday report, DBS Group Research analyst William Simadiputra expects a stronger 4Q19 for the group on the back of higher palm oil prices and strong output momentum. 

“First Resources’ aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong crude palm oil (CPO) volume and yield,” says Simadiputra. 

“Higher CPO yields on maturing trees would improve FR’s return on invested capital (ROIC) and profitability metrics on the back of an expanded operating scale, to result in stronger earnings growth momentum ahead,” he adds. 

Analysts at RHB Group Research affirm the view, honing in on the group’s cost-efficient operations and booming biodiesel industry exposure.

“The firm’s mostly upstream operations will stand it in good stead in a CPO price upcycle, while FR will also benefit from higher biodiesel profits as Indonesia implements its B30 mandate in 2020,” says RHB’s Singapore research team. 

First Resources’ management has revised its output guidance for the fresh fruit bunch (FFB) segment again, predicting a flat or negative growth for 2019. While this could affect one of the group’s key segments, analysts note that First Resources could well benefit from this.

“The group indicates that quarterly production may have peaked in 3Q. First Resources also revealed that 1H20 production may be impacted by the dry weather in 3Q19,” says CGS-CIMB Research analyst Ivy Ng. 

But Ng says that this, along with the higher biodiesel mandate in Indonesia, will help boost CPO price, which in turn offers high earnings leverage and attractive valuations for the group. 

Moving forward, the group is slated to witness a strong recovery in 4Q19. Maybank Kim Eng Research analyst Ong Chee Ting expects the upcoming quarter’s earnings to be “the strongest”.

“CPO prices have risen sharply thus far in 4Q19,” shares Ong, noting that as at Nov 10, CPO spot price was US$587/tonne. 

“Looking forward, 4Q19 prospects look better as CPO price has finally risen to reflect industry-wide supply concerns,” he says, adding that the higher price brings hope of much stronger earning prospects for the group. 

But Ong cautions that there are several risk factors for the group. These include weather

anomalies resulting in poorer-than-expected output growth, lower-than expected CPO price achieved, negative policies imposed by import countries as well as weaker competing oil prices (such as for soybean and rapeseed).

On the back of limited upside and the group’s recent output adjustments, Maybank has downgraded First Resources to “hold” from the previous “buy”, but has increased the group’s target price to $1.86 from the previous $1.80. 

Other brokerages, however, remain bullish on the group’s ability to bounce back in 4Q19 on the back of a better industry outlook and higher profitability. 

DBS, CGS-CIMB and RHB are all maintaining their “buy” calls on First Resources. Both DBS and RHB have a target price of $1.95, while CGS-CIMB has a target price of $.194. 

As at 12.39pm, shares in First Resources are trading 3 cents higher, or 1.7% up, at $1.82. This translates into a price to earnings (P/E) ratio of 25.4 times and a dividend yield of 1.5% for FY19F according to DBS valuations.