DBS Group Research analyst William Simadiputra has downgraded his “buy” call on First Resources to “hold”, with an unchanged target price of $1.83.
In a Nov 2 note, Simadiputra says First Resources’ share price performed well amid rising crude palm oil (CPO) prices. Its share price climbed 32% year-to-date, outperforming its plantation peers.
Despite this, Simadiputra believes further share price upside potential is limited, unless First Resources 2H21 earnings beat DBS’ expectations.
He adds that First Resources is also trading at a premium price-earnings (PE) multiple versus its Singapore-listed peers. The company is trading at 14.4 times FY22F PE multiple, while Wilmar International and Bumitama Agri are trading at 13.5 times and 8.6 times respectively.
“The premium valuation should cap share price performance given that its share price has climbed by 32%, versus Bumitama and Wilmar at 8% and -10% respectively,” says Simadiputra.
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He notes that First Resources multiple is still below its 5-year average of 16.6 times. However, the company needs to prove its high productivity advantage to deliver stronger than expected 2H21 earnings amid the strong CPO environment.
“We believe First Resources’ earnings has room to further improve on stronger realised CPO selling price, amid the current high CPO price benchmark trend and unhedged sales volume. We reiterate our earnings forecast that First Resources is set to achieve 12% y-o-y earnings growth to US$134 million in 2021,” says Simadiputra.
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The absence of extreme changes in progressive export tax and levies will also prevent any higher-than-expected charges and selling price deductions that may hurt the earnings performance. Hence, the company could enjoy the benefit of high CPO prices better in 2H21 than 1H21, says Simadiputra.
“We expect First Resources to post earnings growth of 8.6% y-o-y to US$146 million in 2022, mainly driven by steady CPO selling price at around US$622 per metric tonne and 8% CPO sales volume expansion.
“First Resources has young nucleus estates trees, producing high CPO yield per hectare in the next decade. This will help it to achieve strong profitability and double-digit ROE,” says Simadiputra.
As at 2.46pm, shares in First Resources are trading 3 cents higher, or 1.84% up at $1.66.
Photo: Bloomberg
