Brokers’ take: Analysts downgrade First Resources, lower Q2 expectations

CGS-CIMB and UOB Kay Hian (UOBKH) have downgraded their calls on First Resources from “add” and “buy”, respectively, to “hold” after the Indonesian palm oil producer reported its results for the first quarter ended Mar 31, 2022.

Both brokerages think the group will see weaker quarter-on-quarter earnings in the Q2 ahead, due to the country’s complete ban on palm oil exports since April.

In a report on Monday (May 16), CGS-CIMB analyst Ivy Ng said she expects lower sales volumes and higher operating costs for First Resources going forward.

She estimates Indonesia’s Apr 28 move to impose a temporary export ban on certain palm oil products has disrupted the group’s ability to export about 75 per cent of its refined palm products.

“First Resources has reduced its purchase of third-party fresh fruit bunches (FFBs) to reserve storage capacity for its own and plasma estates. Its crude palm oil (CPO) sales in Q2 FY2022 are likely to be affected due to potential port congestion when the export ban is lifted,” added Ng.

While CGS-CIMB expects the group to post a 66 per cent higher FY2022 net profit due to higher CPO prices and a dividend yield of 5 per cent, the brokerage has trimmed its price target to S$2.10 from S$2.12.

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Its downgrade comes as the stock has appreciated 38 per cent in the year to date. The brokerage also sees further downside risk to its earnings projections should Indonesia’s export ban last for more than a month.

On the contrary, UOBKH raised its target price on First Resources to S$2.30 from S$2.10 after raising its FY2022-2023 estimates to factor in higher CPO ASP (average selling price) assumptions.

Despite the higher target price, the research house has downgraded its call on the stock due to uncertainty from the latest Indonesian policies, and the impact from current export bans.

Like CGS-CIMB it also projects the group’s Q2 earnings to come in lower quarter on quarter, dragged by the export bans and lower total FFB processed.

“As export sales have been halted for the time being and coupled with the limited storage capacity, refining operation would have to be reduced which would result in a low utilisation rate and lower downstream margin,” said UOBKH analysts in a report on Tuesday.

“Even though First Resources would be able to convert some of its CPO into other items that can be exported, we reckon that the sales volume would be small,” they added. 

Noting slow local sales while the exports market is temporarily closed, the analysts highlighted a potential for short-term cash flow to be affected for most palm players in Indonesia.

They however believe First Resources is in a “better position” compared to its peers as it is still able to generate operating cash flow from the sales of biodiesel to fulfil the local mandate and export the balance of the palm products not subjected to the ban.

Shares of First Resources were trading flat at S$2.11 as at 10.25 am on Tuesday.