Brokers' take: DBS upgrades First Resources to 'buy' following share price correction

DBS Group ResearchD05 has upgraded First Resources EB5 to "buy" from "hold" with an unchanged target price of S$1.83. The recommendation comes after the palm oil producer's share price corrected by 20 per cent in November, presenting a good buying opportunity.

The research team's target price of S$1.83 remains unchanged, representing a potential upside of 19.6 per cent from First Resources' closing price of S$1.53 on Wednesday (Dec 8). The counter was up S$0.02 or 1.32 per cent at the time.

DBS believes the stock is still "attractively valued" despite being up 10 per cent in the year to date. First Resources is trading at 11.9 times the research team's FY2022 earnings estimate, "well below" its 5-year average PE multiple of 16.5 times, due to a narrowing crude palm oil (CPO) yield premium versus peers.

That being said, those concerns have been "well priced in" at the company's current share price level. DBS said in a research note dated Dec 7.

It has also maintained its forecast that earnings will expand 8.6 per cent year on year to US$146 million in FY2022, despite assuming higher CPO selling prices. This is to buffer against any unexpected cost escalation, especially fertilisers.

It noted that upside potential from the current share price level is appealing, as present CPO trends will allow First Resources to recover its earnings in Q4 2021 and H1 2022. Last year, earnings were hurt by unfavourable CPO price hedges.

"Despite the higher CPO selling price outlook, we prefer to stay conservative, as we prefer to see whether First Resources could start to beat our expectation at least in Q4 2021, amid the current favourable selling price environment," DBS said.