The Singapore research team at RHB Group Research has downgraded their rating for First Resources from “buy” to “neutral”, in a research note dated Oct 8.

The team has raised their target price to $1.70, up from $1.50 previously and implying a 7.6% downside.

The downgrade comes despite an improvement in earnings anticipated for the 2HFY2021 ending December on the back of higher crude palm oil (CPO) prices. ‘With CPO prices at all-time highs, and the forward hedges from 1H2021 fully unwound, we believe First Resources should benefit in 2H2021, with earnings expected to jump exponentially versus 1H2021,” the team notes. 

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First Resources’ inventory build-up amounting to 170,000 tonnes is also expected to boost earnings. The team is forecasting that the company’s EBIT margins in 2HFY201 could “easily double” from the 23.6% recorded in 1H2FY021.

The team also highlights that production growth momentum remains strong, and expects First Resources may end the year slightly above its guidance of 0-5% in fresh fruit bunches (FFB) growth for FY2021. “We have raised our FFB growth to 5-7% (from 4-5%) for FY2021 to FY2023,” the team says. 

Costs are expected to “remain manageable” in FY2021 but rise in FY2022, driven by higher fertiliser prices. “All in, we raise our earnings by 10-12% for FY2021-2023,” the team concludes.

Nonetheless, the team views that the anticipated improvement is already reflected in First Resources’ share price. They note that in the last two months, the share price has increased more than 30%. “As such, we believe First Resources is now fairly valued, trading at 17 times FY2021 earnings and 12 times FY2022 earnings, in line with historical averages,” they remark.

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Their target price of $1.70 is based on 12 times FY2022 earnings and imputes an 8% ESG discount, as the company scored an ESG score based on RHB's methodology of 2.6, which is lower than the country median of 3.0. 

Shares in First Resources closed 1 cent or 0.54% lower at $1.83 on Oct 8.

Photo: Bloomberg