Brokers' take: UOBKH downgrades First Resources to 'hold' after earnings disappointment

UOB Kay Hian (UOBKH) has downgraded its call on First Resources from "buy" to "hold" with a lower price target of S$1.40 compared to S$1.50 previously.

The move comes after First Resources on Friday posted a 16.7 per cent fall in net profit to US$32.6 million for the six months ended June 30, missing UOBKH and consensus estimates due to lower-than-expected average selling price (ASP) and delays of sales bookings.

In a report on Monday, the brokerage's analysts opined that the group's H2 profits should come in "significantly better" on recovering ASP and sales volume, as lower price contracts have been fully delivered in the period under review.

"We expect H2 FY2021 earnings to improve as Indonesia has reduced the export levies which will help to reduce the export tax burden for exporters in H2. The revised export levy structure would also result in higher net selling price. H2 ASP will be more reflective of the current high selling price," they said.

Noting an inventory build-up of 20,000 tonnes as at June 2021, the analysts are also expecting higher sales volumes during the quarter as market players held back their orders in Q2 in anticipation of Indonesia's downward revision of export levies, which was effective from July 2021.

UOBKH has nonetheless revised its earnings estimates for FY2021 and FY2022 down by 14.3 per cent and 4.5 per cent to factor in higher fertiliser costs, partially offset by improved downstream margins.

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

The resultant target price revision reflects a dividend yield of 5.1 per cent and a payout of 50 per cent, as well as a valuation pegged at 11 times FY2022 price-to-earnings (P/E), which is two standard deviation points below the stock's five-year average mean.

Likewise, Maybank Kim Eng (Maybank KE) is expecting a much-stronger H2 for First Resources on expectations of better fresh fruit bunches output and crude palm oil (CPO) prices, despite noting a "slow start" in H1 although the results were still considered within the brokerage's expectations.

It maintains "buy" on the stock while lowering its target price to S$1.81 from S$1.88 to base its valuation on a rolled-forward 14 times FY2022 P/E, pegged at one standard deviation point below the five-year mean on "slowing growth prospects".

"Following our industry-wide CPO price upgrade, we have raised our FY2021 to FY2023 earnings per share by 6 per cent, 4 per cent and 4 per cent respectively," said Maybank KE in a report issued on Sunday.

First Resources ended S$0.02 or 1.4 per cent higher at S$1.42 on Monday.