Analysts have shown mixed reactions after First Resources reported 2HFY2020 earnings of US$53 million ($70.5 million), down 7% y-o-y. The decrease in earnings was caused by lower than expected crude palm oil (CPO) prices due to forward sales transactions and higher inventory build-up due to heavy rainfall, among other factors.

RHB has downgraded its rating from ‘buy’ to ‘neutral’ with a lower target price of $1.60 from $1.90 previously, despite the company’s FY2020 results being in-line with its expectations. The downgrade reflects the brokerage’s belief that the company’s “aggressive” forward sales could be detrimental to FY2021 earnings potential.

SEE:First Resources: Seeking prosperity in palm oil

“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,” the research team writes.

RHB also notes that First Resources’ fresh fruit bunches (FFB) production for FY2020 fell 3.5% y-o-y and have tweaked their FY2021 FFB assumptions downwards slightly. In addition, the company expects a slightly higher cash cost (between US$220 to US$240 per tonne) and potentially lower downstream margins due to higher processing costs for biodiesel in FY2021.

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RHB’s reduced target price of $1.60 is based on a lower P/E ratio of 14 times (previously 15 times).  FY2022 forecasted earnings have been reduced by 9-10% after lowering downstream margins.

Meanwhile, Maybank Kim Eng analyst Ong Chee Ting says that First Resources remains promising, maintaining his ‘buy’ rating albeit with a lower target price of $1.88 (from $1.96) on the back of lower FY2021 and FY2022 earnings estimates.

While Ong acknowledges that the company’s forward sales cause some uncertainty for its H1FY2021 downstream outlook, he remains upbeat on the company’s prospects.

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“Despite downstream uncertainties, we are still projecting a 34% FY2021 core EPS growth premised on higher CPO ASP for its upstream division of US$607 per tonne (+12% y-o-y) and higher FFB output (+5% y-o-y), which should more than offset lower y-o-y downstream contribution,” he says.

Ong positively views First Resource’s announcement of its dividend payout ratio of 50% from FY2021 onwards, up from its previous payout ratio of 30%. He also cites the company’s inventory build-up as potentially beneficial for its FY2021 bottom line and notes that First Resources’ all-in cost to its customers remains low at an estimated US$300 per tonne.

As at 3.37pm, shares in First Resources are trading 2 cents or 1.4% lower at $1.38.