SINGAPORE (May 15): RHB is reiterating its “neutral” call on First Resources with a fair value estimate of $1.75.

However, RHB’s preferred pick for Singapore plantation stock is Wilmar.

First Resources announced that its 1Q18 earnings of US27.7 million ($37 million) was 44% lower than 1Q17, while its profit from operations declined by 40% y-o-y to US$43.3 million.

The lower net profit and profit from operations were mainly due to the effects of inventory build-up and lower average selling prices.

Sales decreased by 30.2% to US$135.6 million in 1Q18, reflecting the combined effects of lower sales volumes and average selling prices.

See: First Resources reported 43% fall in 1Q earnings to US$27.7 mil

In a Tuesday report, RHB says, “1Q18 core net profit came in below expectations, comprising 14-16% of our and consensus’ FY18 earnings. The main difference was a reversal into negative territory for the downstream division, and a build-up of 37,000 tonnes of CPO inventory during the quarter (vs a drawdown of 46,000 tonnes in 1Q17).”

In 1Q18, crude palm oil (CPO) prices declined by 7.4% y-o-y to an average of US$588 per tonne, which is slightly below RHB’s FY18 projection of US$606 per tonne.

“For every RM100/tonne change in CPO price, we estimate its earnings would be impacted by 4-5% pa,” says RHB.

On the other hand, the group’s downstream margins reversed into the red during the period to -0.6%, on the back of lower selling prices and lower sales columes.

“We are keeping our downstream forecasts, which assume positive margins of 3-4% going forward, pending more information from the analyst briefing to be held later today,” says RHB.

Currently, the research house will be maintaining all its projections. If all the CPO inventory build-up is sold, the company’s earnings would be considered as being largely in line.

In addition, the group’s extensive exposure to Riau puts it at risk, in the face of weak weather-led productivity, while valuations look fair at current levels.

As at 11.17am, shares in First Resources are trading 1 cent lower at $1.60 or 1.8 times FY18 book with a dividend yield of 3.0%.