Brokers' take: RHB upgrades First Resources to 'buy', raises target price

RHB has upgraded palm oil producer First Resources to a "buy" from "neutral", and raised the target price to S$1.70 from S$1.60 due to assumptions of "boosting crude palm oil (CPO) prices".

The research house also raised its estimated CPO prices to RM3,200 per tonne from RM2,650 for 2021, and RM2,800 from RM2,600 for 2022.

However, RHB said that it would roll forward its valuations to 2022, as it believed that "investors should start to look ahead to identify winners, even under a lower-price environment".

This is because the risk for prices are "on the downside from hereon", and that the sector's share price performance could also be "hampered by environmental, social and corporate governance concerns" going forward.

Based on latest forecasts by Oil World and the United States Department of Agriculture, the supply and demand of oils and fats and CPO should be "relatively tight in 2021, although balanced by "relatively muted demand". Further, tight supply and demand numbers will likely keep oilseed and vegetable oil prices elevated throughout 2021, RHB said.

Due to increased planting activities of oilseeds to take advantage of current high prices, RHB believes that soya bean and other oilseed prices will moderate in 2022, along with CPO prices.

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

RHB also believes that stock to usage ratios will see an increase to an estimated 17 per cent in 2022, up from 16.2 per cent in 2021, keeping CPO prices above the 20-year historical average of RM2,500 per tonne.

Given the rising stock to usage ratio trend, RHB highlighted that CPO prices will likely be lower year on year in 2022.

However, it noted that the impact of the CPO price increase is not as significant for First Resources, given its forward sales locked in for 2021 and the impact of Indonesia's export tax and levy.

As such, RHB has raised First Resources' earnings by 11 per cent for FY2021 and by 4-9 per cent for FY2022-2023.

It also said the stock is now trading at "more reasonable levels". RHB has rolled its valuation forward to 2022 with a lower price to earnings (PE) target of 13 times from 14 times, as the research house expects the PE to return to the historical mean when CPO prices normalise.

First Resources shares ended Thursday at S$1.49, up 1.36 per cent or S$0.02.