UOB Kay Hian analysts Jacquelyn Yow and Leow Huey Chuen have upgraded First Resources to “buy” with an unchanged target price of $1.85.
The upgrade comes as the analysts see an opportunity to buy into the stock on the back of strong dividend yield and its better-than-peers' financial performance in 4QFY2022.
“Our valuation is pegged to 9x FY2023 P/E,” they write.
Yow and Leow’s upgrade also comes ahead of First Resources’ results for the 4QFY2022 ended Dec 31, 2022, which is slated to be released on March 1.
“Based on our estimates, we expect First Resources to report a core net profit of about US$90 million – US$100 million ($119.4 million - $132.7 million) for 4QFY2022,” note the analysts. This is compared to the core net profit of US$116 million in the 3QFY2022 and the US$290 million reported in the 4QFY2021.
To them, the key items to look out for during the 4QFY2022 are the average selling prices (ASPs) for crude palm oil (CPO), which they expect First Resources to perform better than their peers.
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“As First Resources had sold forward some of its contracts in 1HFY2022, we believe that CPO ASP for 4QFY2022 may be flat q-o-q but come in higher than peers. We think the risk management strategy of First Resources positioned in 1HFY2022 would allow First Resources to have a better pricing strategy,” they write.
In addition, the analysts anticipate First Resources to report higher sales volume in the 4QFY2022 with higher drawdown, especially from its Chinese buyers due to the attractive CPO pricing in the quarter.
“This is in line with management’s expectation of lumpy inventory level normalising in 4QFY2022,” note Yow and Leow.
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Finally, the analysts expect First Resources’ refining margin to remain stable on the back of “relatively stable” CPO prices in the 4QFY2022.
“Refining margin would also be supported by the lower feedstock prices and strong export sales volume,” they add.
Ahead of the group’s results for the 4QFY2022, the analysts are expecting First Resources to turn to a net cash position on the back of its strong cashflow-generating upstream operations.
“We expect First Resources’ net cash position to translate to about 22 cents per share as of end-December 2022,” they write. “With this, we expect attractive dividend yields of 9.7% and 7.2% for 2022 and 2023 respectively.”
FFB production to recover in 2023
In 2023, Yow and Leow expect the production of fresh fruit bunches (FFB) to recover strongly. This follows the assumption that First Resources’ production in the 4QFY2022 is likely to come in lower q-o-q due to the seasonally low production cycle and heavier rainfall.
That said, the lower production during the quarter is still within the analysts’ expectations and is still on track for the group to meet their expectations of a 4% y-o-y growth for FY2022.
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“Recall that Indonesia experienced high rainfall mainly due to the impact of the triple La Nina (which affects harvesting and transportation activities). Moving forward to FY2023, we had pencilled in a higher FFB production growth of 7% y-o-y on the back of yield recovery, better harvesting round and crop recovery with the expectation of more normalised weather,” they write.
The cost of production is also expected to be slightly lower y-o-y.
“Based on our channel checks, fertiliser prices have dropped significantly by 30%-40% since January as compared to 2HFY2022. In addition, shipment fees have also dropped significantly by 40%-50% in January as compared with 2HFY2022. Hence, we reckon that the cost of production may be slightly lower y-o-y even though we are expecting a slight increase in labour and operational cost. Most of the impact of the lower fertiliser cost would be reflected in 2HFY2023,” say Yow and Leow.
For the FY2022, FY2023 and FY2024, the analysts have forecast net profits of US$343 million, US$245 million and US$237 million respectively. “We believe First Resources could see record-high earnings in FY2022 with net profit exceeding the US$300 million mark.”
Based on First Resources’ dividend payout ratio of 50%, the group will boast a “strong” final dividend yield of 8% in February along with its 4QFY2022 results, the analysts add.
As at 4.36pm, shares in First Resources are trading 11 cents higher or 7.24% up at $1.63.
