Analysts have somewhat differing views on agriculture company First Resources (FR) EB5 following its latest 1HFY2023 ended June results release.
During the period, earnings declined by 44.1% y-o-y to US$71.5 million, while sales were 16.1% lower y-o-y at US$448.8 million. The lacklustre results, according to the group, were a result of the moderation of crude palm oil (CPO) prices in 1H2023, as compared to the record high CPO prices seen in 1H2022.
The group had noted in its results release that CPO prices in the near- to mid-term are expected to be influenced by the geopolitical situation in the Black Sea, as well as the anticipated weather impact of El Nino on the output of palm and other competing oils. Nonetheless, the fundamentals of the palm oil industry remain supported by Indonesia’s B35 biodiesel mandate and Domestic Market Obligation (DMO) policy, which are expected to continue driving domestic demand and consumption, limiting the country’s palm oil export volumes.
To that end, RHB Bank Singapore is reiterating its “neutral” call on FR with a higher target price of $1.50 from $1.40 previously. The group’s 1HFY2023 results were largely in line with the research team’s expectations and they expect for 2HFY2023 to see strong earnings on improved productivity and moderating costs.
On that note, FR has lowered its fresh fruit bunches (FFB) output guidance to flat for FY2023, expecting production to pick up in 2HFY2023, with the 1H:2H output ratio at 42%:58%. ““We keep our FFB growth assumptions at +1% to 3% y-o-y for FY2023 to FY2025,” says RHB.
Meanwhile, fertiliser application is still slow in 1HFY2023, as the group only applied about one-third of its fertiliser requirements during the period, but expects to be able to catch up on its application by year-end, as the weather is drying up. While the group does not guide on quarterly unit costs, it believes that unit costs are still on track to reach US$280-US$300 per tonne, an increase of 2.9% y-o-y in FY2023. For FY2023, fertiliser cost is estimated to be 25% lower y-o-y.
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FR’s downstream margins remained negative in 2QFY2023, resulting in 1HFY2023 Ebitda margin of -7.1% (from 11.3% in 1HFY2022). This was due to lower utilisation of close to 50% (from 100% in 1HFY2022), as more oil was channelled for the domestic market obligation (DMO) initiative. As a result, margins were also affected due to the low margin DMO business.
“This should improve in 2HFY2023 as DMO volume has normalised, while the tax differential between upstream and downstream products in Indonesia has widened, implying better margins in 2HFY2023,” says RHB.
The stock’s valuation is also deemed fair, as it is trading at 9x FY2024 P/E, in line with its peer range of 6x to 12x.
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On the other hand, Maybank Securities is keeping a more bullish outlook on FR, as it keeps its “buy” recommendation albeit with a lower target price of $1.83 from $1.85 previously. Analyst Ong Chee Ting likes the stock for its single-digit P/E and more than 5% dividend yield.
While the analyst notes that the group has been off to a slow 1HFY2023, he expects a much stronger 2HFY2023 performance mainly on sharply higher h-o-h output growth and downstream returning to the black.
FFB nucleus output for 1HFY2023, which was 5% lower y-o-y, came in just 42% of Ong’s full-year forecast. While FR is guiding for a much stronger output recovery in 2HFY2023, it revised down its total FY2023 output guidance to be flat y-o-y.
“Following our industry-wide CPO average selling price (ASP) revisions to RM3,700 per tonne (from RM3,400 per tonne) for 2023, and RM3,500 per tonne (from RM3,200 per tonne) for 2024-2025 respectively, our FY2023/FY2024/FY2025 EPS forecasts are raised by +1%/+4%/+7% after cutting our FY2023 FFB nucleus output (-2.4%) and downstream contribution,” says Ong.
Shares in First Resources closed 2 cents lower or 1.33% down at $1.48 on Aug 17.
