Brokers’ take: Maybank upgrades First Resources to ‘hold’, sees limited downside risk

FIRST Resources’ recent share price sell-off has largely priced in Indonesia’s regulatory risks related to the country’s export policy, according to Maybank Research.

The research house has upgraded the Indonesian palm oil producer to “hold” from “sell” despite lowering its target price to S$1.62 from S$1.94 previously to factor in such regulatory risks.

This comes as the Indonesian government has achieved its target to bring down crude palm oil (CPO) prices, which should limit further downside risk for the stock, said analyst Ong Chee Ting in a report on Monday (Jul 4).

Ong attributes the earlier-than-expected correction in Malaysia’s crude palm oil futures contracts to a number of factors including an oversupply of Indonesia’s recently-lifted export ban, expectations of a seasonal pickup in CPO output in H2, and concerns over a potentially strong year-on-year rebound in crops due to smooth progression of planting in the Northern Hemisphere.

Overall market sentiment has also been dampened by events such as the recent aggressive interest rate hike by the US Federal Reserve with potentially more to come, he added.

While the analyst believes the situation of weak domestic CPO prices appears “even more dire” in Indonesia, he reckons it is only temporary as prices should recover when domestic stockpile normalises.

This could happen as soon as end-July or early August this year when Indonesia’s export taxes are cut to reflect the presently lower global CPO prices, he said.

No changes have been made to Maybank’s earnings projections for First Resources as the research house keeps its industry-wide CPO average selling price (ASP) forecasts of 5,000 and RM3,400 per tonne for 2022 and 2023, respectively.

“Nonetheless, we do not discount the possibility of (First Resources’) Q2 2022 sales and profit recognitions being deferred to Q3 2022 due to export restrictions or ban imposed in Q2 2022,” said Ong.

First Resources was S$0.01 or 0.6 per cent lower at S$1.61 as at the midday trading break on Monday.

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