UOB Kay Hian analysts Jacquelyn Yow Hui Li and Leow Huey Chuen have upgraded First Resources to “buy” with an unchanged target price of $1.70.
In their Oct 28 report, the analysts’ note that First Resources’ share price had declined by 14% since UOBKH’s last downgrade in June. This could have factored in the negative earnings impact from Indonesia’s policy changes.
“First Resources’ share price has strengthened by 11% from its recent low in mid-October which is in tandem with the recent rebound in crude palm oil (CPO) prices due to market concerns about the serious flooding situation in Central and West Kalimantan, which may lead to lower-than-expected Indonesia palm oil production and the extension of the Black Sea Grain Deal which will be expiring in early-November,” the analysts add.
First Resources’ 3QFY2022 ended September results announcement is scheduled to be released on Nov 14. Based on its current estimates, UOBKH expects the company to report a core net profit of US$55 million ($77 million) to US$60 million for the period.
Key items to look out for include lower upstream margin due to lower CPO average selling prices (ASPs) and higher costs, mainly from fertilisers. The analysts also expect stronger sales volume, with the high inventory carried from 2QFY2022 as well as the recovery of Indonesia palm oil exports as the government slowly relaxes the exports control.
“With the Indonesian government encouraging palm oil exports since June and more relaxation in the Domestic Market Obligation (DMO) and the Flush Out programme, we expect strong sales volume, especially in its refined products in 3QFY2022. On top of that, we anticipate better biodiesel sales as well, thanks to cheaper palm oil biodiesel vs gasoil which led to higher export sales,” they add.
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The analysts reckon that First Resources’ fertiliser application may still be delayed in 3QFY2022, mainly due to the unfavourable weather in Indonesia. On top of that, the high rainfall season is still continuing in 4QFY2022 with floods happening in Kalimantan. Hence, they suspect that the company would not be able to fully apply its fertiliser as per its initial target.
Yow and Leow maintain their net profit forecasts for FY2022-FY2024 at US$247 million, US$229 million and US$231 million respectively.
They highlight First Resources’ generous dividend policy, with up to 50% of its underlying net profit starting from 2022. “With our assumption of 50% dividend payout ratio, this translates to a stable dividend yield of 6%-7% for FY2022-FY2024 despite our lower CPO ASP assumption for FY2023-FY2024 at RM4,000 per tonne.”
As at 9.54am, shares in First Resources are trading 2 cents lower or 1.27% down at $1.55.
