Brokers' take: RHB downgrades First Resources to 'neutral'; target prices cut

FOLLOWING the release of First Resources' FY2020 results last Friday, RHB has downgraded its call on the Indonesian palm oil producer from "buy" to "neutral" and lowered its target price to S$1.60 from S$1.90 previously.

In a Friday report, RHB said that while the group's earnings were in line with expectations, it believes the company's more aggressive forward sales could have a "detrimental" effect on its earnings potential in 2021, with lower realised crude palm oil prices and higher applicable export levies.

The research house said First Resources' "disappointing" H2 and FY2020 ASPs of US$533 and US$541 were likely owing to such forward sales, which the company said it began a "meaningful percentage" of in H2 of 2020 and continued in the first half of 2021.

"Aggressive forward sales have a double-whammy effect on earnings as the recognised average selling price (ASP) is lower in a rising market and the export levy applicable is higher, as it is based on the rate applicable upon delivery," said RHB in its report.

Being unable to fully impute the risks from the forward hedges without knowing the exact quantum, the research house has lowered its FY2021 to FY2022 forward earnings for First Resources by 9 to 10 per cent after reducing downstream margin estimates. This implies an enterprise value per hectare (EV/ha) of US$13,000/ha, in line with its peers of US$10,000 to US$15,000/ha.

In separate reports issued on Monday, UOB Kay Hian (UOBKH) and Maybank Kim Eng (Maybank KE) maintained their "buy" calls on the stock while reducing their target prices to S$1.70 from S$1.85, and to S$1.88 from S$1.96, respectively.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

UOBKH lowered its net profit forecasts for FY2021-2022 by 8-10 per cent after factoring in forward sales at reduced selling prices. The brokerage has also cut its fresh fruit bunches assumption to result in lower net profit forecasts from now up until FY2023.

It nonetheless said it continues to like First Resources for its "good track record of delivering better-than-peers' performance", and that it still expects year-on-year earnings growth of 50 per cent in FY2021 due to higher ASP and sales volume.

Likewise, Maybank KE thinks the financial year ahead will remain "promising" for First Resources despite the uncertain forward-sales impact as it believes a net inventory build-up at end-H2 FY2020 as well as a fair-value loss on derivative financial instruments are likely to benefit the group's bottom line in FY2021.

Due to the uncertainty of forward-sales impact, it has assumed zero FY2021 downstream earnings before interest, taxes, depreciation and amortisation, but continues to forecast a 34 per cent increase in the group's earnings per share for the year due to its upstream growth.

"First Resources guides that it has forward sold a meaningful percentage of its 1H21 output without providing specifics. What we know is the export taxes payable to the government cannot be hedged and hence First Resources would have to bear the difference between the export taxes in the month of delivery compared to when it was locked in," noted Maybank KE.

Shares in First Resources closed one cent, or 0.69 per cent, higher at S$1.46 on Monday.