Palm oil blue chip Wilmar International has taken the market by storm, reaching a five-year high of $5.56 on Jan 25 before closing at $5.53. But for investors seeking an alternative exposure to the agri-commodities sector, First Resources may prove to be a viable option, flagged by some analysts as an excellent buy going into the Year of the Ox.
“Given Wilmar’s strong share price performance, we switch it out of our portfolio and add First Resources, given that it is a direct beneficiary of higher crude palm oil (CPO) prices,” report UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow, who have named First Resources as one of UOB’s high-conviction top alpha picks for 2021. The analysts are also raising their CPO price forecast by 15% to RM3,000/ tonne ($983.36/tonne) for 2021.
Much of this bullishness stems from the counter’s relative resilience after the Indonesian government revised its export levy structure on palm oil exports effective Dec 10 last year. The goal is to beef up Indonesia’s fast-depleting biodiesel fund. RHB analysts Hoe Lee Leng, Christopher Andre Benas and Juliana Cai believe that Jakarta can now support B30 output fully for 2021 — an upside for CPO prices.
The levy will be raised by US$12.50 ($16.57) to US$15/tonne for every US$25/tonne increase in CPO reference price beyond US$670/tonne up to US$995/tonne. Previously, levies were fixed at US$25–55/tonne for CPO and processed palm products regardless of CPO price.
This policy is expected to hurt upstream planters in Indonesia as they would not be able to enjoy their usual improvement in earnings should CPO prices exceed US$670/tonne. However, downstream firms in Indonesia are expected to benefit from improved processing margins arising from the wider differential in export levy rates between processed palm oil and CPO.
As an integrated palm oil producer, First Resources will be exposed to both trends. Yet Ivy Ng and Nagulan Ravi of CGS-CIMB Research see upstream losses partially offset by the higher downstream earnings. Higher CPO prices from the continued support for B30 will also be an upside catalyst for First Resources, note Leow and Yow, since its performance is highly leveraged to CPO.
“We gather that Indonesia’s CPO planters are still benefiting from high CPO prices despite the progressive levy scheme. Thus, we believe that investors should accumulate First Resources (FR) ... shares,” says DBS analyst William Simadiputra. With First Resource’s estates now on a high-yield productivity cycle given their prime age of 13 years, Simadiputra sees the planter outperforming in terms of profitability and ROE. He sees First Resources as the best proxy for investors to ride on CPO price recovery going forward.
The UOB duo also likes First Resource’s fresh fruit bunch (FFB)-production growth, since most of its estates are located in Riau, Indonesia. Local climatic conditions means that dry weather in 2019 and recent high rainfall have not impacted its assets significantly. FFB production growth for First Resources is seen to be 6% y-o-y in 2021; higher oil extraction rates vis-a-vis sectoral peers will also improve profit margins.
Recent earnings have been resilient, with First Resources reporting 3Q2020 earnings of US$37 million, up 33% y-o-y and 76% q-o-q, thanks to higher average selling prices. Maybank Kim Eng’s Ong Chee Ting predicts further growth in q-o-q earnings in 4Q2020 due to a spike in CPO prices offsetting expected weaker output.
Ong also sees lower estate costs q-o-q in 4Q2020, as First Resources has completed nearly 90% of full-year fertilising requirements in 9M2020. The firm has also indicated that it has secured slightly higher-than-usual forward sales due to rising palm oil prices. “First Resources is our top buy among the large caps. We like its integrated model, strong management and low production cost,” he writes.
“We like its good track record of delivering better-than-peers’ performances,” agree Yow and Leow. The company’s recent aggressive share buyback should lend additional support to its share price. As of Nov 16, 2020, it has bought back 5.92 million shares at prices ranging between $1.20–1.53.
Currently trading at 13.8 times FY2021 P/E, First Resources is now one standard deviation below its five-year average P/E ratio of 16.7, which Simadiputra considers to be undemanding. Leow and Yow reckon 2021 dividend yield and ROE will come in at 2.7% and 12.2 respectively.
