Brokers’ take: CGS-CIMB upgrades First Resources to ‘add’, lowers target price

CGS-CIMB has upgraded its call on palm oil producer First Resources to “add” from “hold” as the research house believes the stock’s risk-reward has turned more attractive, with projected dividend yields of 5 to 7.5 per cent for FY2022 to FY2023.

In a report on Monday (Aug 15), analysts of CGS-CIMB also noted that the stock has declined about 27 per cent since the brokerage’s last update in May, making the company’s valuations and projected dividend yields attractive.

Their target price on the stock has however been cut to S$1.76 from S$2.10 previously, as CGS-CIMB expects crude palm oil (CPO) prices to peak in FY2022. As such, the group’s FY2023 price-to-earnings multiple has been lowered to 11.6 times, compared to 16 times previously, to result in the lower price target.

While expecting First Resources to post an 85 per cent jump in its 2022 net profit, the analysts cut their target price by 16 per cent to S$1.76 based on a 2023 price-earnings ratio of 11.6 times, compared to a price-to-earnings ratio of 16 times prior. This is to reflect the group’s earnings and CPO price likely peaking in 2022.

The research house projects FY2022 net profit to jump 85 per cent on higher CPO price achievement even with “flattish” half-on-half H2 earnings expectations as its analysts expect higher sales volumes and fresh fruit bunches to offset the lower CPO prices and higher operating costs.

“We estimate potentially up to US$10-20 million net profit from H1 FY2022 may have been brought forward into H2 due to Indonesia’s 3-week palm oil export ban in April and May, which affected First Resource’s export sales volumes,” said the analysts.

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Overall FY2022 to FY2024 net profit forecasts have been raised across the board by 0.2 to 13.1 per cent to reflect lower export tax and levy, better downstream margins and a lower effective tax rate.

As at 4.15 pm shares of First Resources were trading at S$1.52.