SINGAPORE (Oct 11): UOB Kay Hian is keeping its “hold” call on First Resources (FR) with an unchanged target price of $1.95, despite expectations that the oil palm plantation will report stronger performance in its upcoming third quarter results.
“We believe current share price has reflected the better earnings in 2H17,” says UOB lead analyst Leow Huey Chuen in a report on Monday.
According to Leow, the research house is anticipating stronger 3Q17 results for First Resources on the back of higher fresh fruit bunches (FFB) production, higher contribution from biodiesel delivery, and better refining margins.
However, this will be partially offset by weaker average selling prices of crude palm oil (CPO).
“We understand that FR engages in forward sales but the volume is undisclosed. Thus, FR is unlikely to benefit from the recent improvement in CPO prices,” says Leow.
The analyst notes that First Resources’ earnings are highly sensitive to CPO prices.
“FR’s earnings are still largely driven by upstream operations,” Leow says. “Any increase in CPO selling prices from our base case of 2,600 ringgit per tonne would be positive to earnings.”
In addition, stronger-than-expected FBB production recovery could also positively contribute to FR’s earnings.
UOB is keeping its FBB production growth forecast for 2017 at 18% – some 3 percentage points higher than FR management’s guidance of 15%.
“We deem management’s guidance very conservative, given that West Kalimantan’s production is expected to show good FFB yield,” Leow says. “Moreover, there will be 17,000ha of new area coming into maturity in 2017, which should provide about 3% FFB production growth for 2017.”
As at 12.23pm, shares in First Resources are trading 1 cent lower at $1.92 or 15.5 times FY17 earnings with a dividend yield of 2.7%.
