Despite 1Q21 underperformance, First Resources can still catch-up in 2H21: analysts

Analysts believe First Resources will have a better 2HFY2021 ended December after its 1QFY2021 results came below expectations.

To that end, analysts from UOB Kay Hian, CGS-CIMB Research and Maybank Kim Eng have maintained their earnings forecasts, underpinning unchanged target prices of $1.65, $1.69, and $1.88 respectively. Their ratings also remain unchanged at 'buy' for UOB Kay Hian and Maybank Kim Eng and 'add' for CGS-CIMB.

RHB Group Research, however, has kept its ‘buy’ call but with a lower target price of $1.60 from $1.70 previously after its FY2021 - FY2022 earnings forecast was cut by 4% - 14%.

UOB Kay Hian analysts Jacquelyn Yow Hui Li and Leow Huey Chuen says that First Resources’ net profit for the 1FY2021, which fell 61% y-o-y, “does not come as a surprise”, due to forward sales done at a lower average selling price (ASP) for a significant volume of its 1H2021 crude palm oil (CPO) production, while it also faced higher export duties following the new levy structure implemented in Indonesia.

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Nevertheless, Yow and Leow believe a “significantly better” 2HFY2021 lies ahead, with operating earnings expected to increase some 24% for the year. The forecast is pegged to expectations of higher sales volume which includes carried-forward sales from 4Q2020, better production growth in 2021, and higher ASP.

They also believe there’s further potential upside for the company if the Indonesian government revises the export levy structure downwards. “Should this materialise, there would be 12% potential upside to First Resources’ earnings, based on our calculations,” they say.

The stock remains a top pick for the plantation sector for the analysts. “We like its good track record of delivering better-than-peers’ performance,” they explain.

CGS-CIMB analysts Ivy Ng Lee Fang and Nagulan Ravi see the weaker 1QFY2021 as a temporary setback for First Resources.

Besides management guiding that 2H2021 production volumes have largely not been hedged forward, the analysts also highlight that First Resources is more bullish on the CPO outlook due to tight soybean oil supplies and rising biodiesel mandates in the US. 

“Assuming 2H2021 production is 5% higher y-o-y and flattish costs, we roughly estimate First Resources will be able to meet our earnings forecast if it is able to achieve a CPO price of US$700 ($935) per tonne (net of export tax and levy). As such, we retain our net profit forecasts,” they explain.

Their target price of $1.69 is based on a P/E of 16 times, based on the historical three-year average.

Maybank's Ong Chee Ting has pegged his target price of $1.88 to the five-year average P/E of 17 times.

He agrees that the company will be able to catch-up in 2HFY2021  from the remaining unhedged output volumes as well as higher production volumes. To that end, he remains upbeat on the stock. "We like First Resources for being a low-cost producer with attractive dividend yields of around 4%," he says.

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SEE:First Resources posts 61% drop in 1Q21 net profit on higher export taxes

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Meanwhile, the RHB Singapore research team says it was unable to gauge how much of First Resources’ decline in net profit was attributable to core net profit due to limited disclosures in the quarterly update. ”We believe the main disappointment was due to lower-than-expected downstream margins, as price competition has intensified. ” they say.

To that end, the team has adjusted their downstream forecasts to take the lower margins into account. 

Nonetheless, the team says investors should look forward to a better 2H2021, as valuations are now “at more palatable levels”.

As at 4.06pm, shares in First Resources are up 1 cent or 0.7% higher at $1.44.