DBS Group Research has lowered its target prices for First Resources : EB5 0% and Bumitama Agri : P8Z 0% but maintained “buy” calls on both counters, as the research house expects them to recover in terms of earnings and share prices.

The cuts are in light of an anticipated improvement in crude palm oil (CPO) prices in 2024, as a result of reduced CPO volumes due to the El Nino climate pattern.

DBS on Tuesday (Jul 11) trimmed its target price for First Resources to S$2 from S$2.50, after lowering its earnings forecast for FY2023 to FY2024 to account for weaker-than-expected palm oil selling prices in the first half of FY2023.

Analyst William Simadiputra said the stock is currently trading in line with its Indonesian peers’ valuations, nothing that the revised target’s price-to-earnings multiple of 12.5 times is slightly higher than its five-year average.

In his view, First Resources’ current price is not a true reflection of the stock’s value, as the general market remains focused on the recent soft CPO prices instead of an expected CPO price improvement in the second half of 2023.

The analyst is confident in the group’s ability to capitalise on higher selling prices even during El Nino, considering its productive estates and low operating costs.

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“Young trees’ age profile also helps First Resources to minimise operating costs, since younger trees require relatively lower maintenance costs to keep the productivity strong,” he added.

The analyst is also positive on the group’s upstream plantation business, which he views as profitable and highly productive; he believes this will help First Resources maintain its strong earnings and dividends.

DBS also lowered Bumitama Agri’s target price, to S$0.90 from S$1, after cutting its FY2023 earnings forecast by 22 per cent. However, the research house raised its earnings projection for FY2024 by 18 per cent to account for the higher palm oil prices that will come with the expected CPO recovery.

Simadiputra likes the stock as a “well-run upstream palm oil company”, due to good estate management.

Looking ahead, he believes “it will reap the benefits of (the) higher palm oil-price trend ahead, with (a) double-digit earnings recovery outlook in 2024”.

Noting that the stock’s current valuation is “undemanding” at a 30 per cent to 40 per cent discount to its peers, the analyst said Bumitama’s earnings recovery has yet to be priced in.

He expects strong future financial performance, given the production cycles of the company’s prime-age palm oil trees, which are anticipated to keep overall cash costs low and CPO yield-per-hectare high beyond 2024.

In the longer term, he estimates that Bumitama Agri could generate an annual dividend of at least S$0.02 per share. This will be supported by healthy CPO prices due to strong biodiesel construction in Indonesia, the group’s main market, he said.

First Resources was trading flat at S$1.52 as at 4.03 pm on Wednesday. Bumitama Agri was at S$0.59, up 2.6 per cent or S$0.015.