Brokers' take: RHB downgrades First Resources to 'neutral'; proposes locking in profit

RHB has downgraded its call on palm oil producer First Resources to "neutral" with a higher target price of S$1.70, from S$1.50 previously, urging that it is time to "lock in some profit".

In a company update on Friday (Oct 8), the brokerage highlighted that it expects First Resources' earnings prospects to improve significantly in the second half of 2021, at higher earnings of 10 to 12 per cent.

However, RHB believes that the post forward sales earnings have already been reflected in the more than 30 per cent jump in share price, and that the palm oil producer is now fairly valued, trading at 17 times the 2021 price-to-earnings ratio (P/E) and 12 times the 2022 P/E.

"With crude palm oil prices at all-time highs, and the forward hedges from H1 of 2021 fully unwound, we believe First Resources should benefit in H2 of 2021, with earnings expected to jump exponentially versus H1 of 2021. This, together with the 170,000 tonnes of inventory build up at end June, should boost earnings in the Q3 of 2021," said the brokerage.

The revised target price of S$1.70 inputs an 8 per cent environmental, social and governance discount, and an enterprise value of US$13,000 per hectare.

The brokerage also noted that First Resources' earnings before interest and taxes margins could double from the 23.6 per cent recorded in the first half of 2021. This is owing to a higher average crude palm oil price for First Resources from July to September 2021 at US$780 per tonne, compared to an average of US$459 per tonne for the first half of 2021. This follows RHB's assumption of minimal forward sales, and costs remaining low at US$220 to US$240 per tonne in FY2021.

RHB has also raised the oil palm fresh fruit bunches (FFB) growth for First Resources at 5 to 7 per cent, from 4 to 5 per cent previously, for FY2021 to 2023.

The brokerage observed that FFB production growth momentum in the second half of 2021 remains strong despite lower half-year on half-year growth, and believes that First Resources may end the year slightly above its guidance of 0 to 5 per cent for FY2021.

On the flip side, although costs for the oil palm producer remain manageable for FY2021, RHB expects costs to rise in FY2022.

Heading into FY2022, RHB noted that fertiliser prices have risen significantly (by 30 to 50 per cent year on year) which translates to a 10 to 15 per cent higher year-on-year unit cost of production for First Resources in FY2022, assuming all else remains the same.

RHB added: "We understand that First Resources is slightly behind on its fertiliser application, at less than 50 per cent in H1 of 2021, and is unlikely to fully apply its 2021 requirements, given the upcoming monsoon season. This could impact 2022's FFB production, albeit minimally. With higher FFB production and lower fertiliser costs, our unit costs for FY2021 are also lowered slightly."

Read more:

• First Resources H1 net profit falls 16.7% to US$32.6m on higher export taxes
• Brokers' take: RHB upgrades First Resources to 'buy', raises target price