Excerpts from UOBKayHian report

First Resources (SGX: EB5)

• We are expecting First Resources’s 2Q23 core net profit at US$25m-28m, lower yoy and qoq due mainly to lower ASP and weak downstream contributions.
• This could be the worst quarter for 2023 but we are seeing higher earnings as CPO prices recover and downstream margin is relatively better now.
• Trim 2023 earnings by 17% after lowering production growth and refining margin.
• We roll over fair value to 2024 at PE of 9x. Dividend yield is still good at 5-6%.

Maintain HOLD. Target price: S$1.55.

First Resources results review

We expect First Resources’ (FR) 2Q23 net profit to come in at US$25m-28m, lower qoq and yoy (core net profit for 1Q23: US$29m; 2Q22: US$54m). We believe 2Q23 would be the worst quarter for 2023 with pressure coming from lower CPO pricing and higher cost of production (catch up in fertiliser application in anticipation of the upcoming El Nino). These would be partially cushioned by higher sales volume given the attactive CPO pricing and lower export duty and levy in 2Q23.

Look forward to 2H23 and beyond

We anticipate a more positive outlook for 2H23, as we foresee improvements in upstream margins and a decrease in fertiliser pricing. Currently, fertiliser prices have experienced a significant decline of approximately 50% compared with Dec 22. It is worth noting that companies typically secure their fertiliser supplies six months in advance of application, buying them semi-annually. The downward trend in fertiliser costs, coupled with a decrease in fuel expenses contributes to our expectation of improved operating margins in 2H23. Furthermore, our internal analysis supports the belief that CPO prices may trade higher from 3Q23-1Q24. We believe that there would be more potential upside for 2024 with the uncertainties from weather risk.

Trimmed 2023 earnings

We have trimmed our 2023 earnings by 17%, pencilling in lower production growth to flat yoy (previously 5%) and lower downstream margin. This revision came after our recent site visit and channel checks. For downstream operations, the frequent changes in exports duty and levy have make it tougher for refiners to price CPO (CPO prices paid to millers are net of the export duty and levy). A sudden increase in CPO prices could led to higher export duty and levy which could negatively impact refiners’ margin as CPO purchased earlier factored in lower export duty and levy.

First Resources dividend yield

Despite lower earnings estimates, at current CPO prices, FR is still generating good cashflow and is in a net cash position. Based on dividend payout of 50%, potential dividend for 2023 would be about S$0.098/share or yield of 5-6%.

Valuation/Recommendation

Maintain HOLD with a target price of S$1.55 after rolling our valuation to 2024, considering our anticipation of a CPO uptrend in late-3Q23 to 1Q24. Our valuation is pegged to 9x 2024F PE. We recommend investors to accumulate FR on the back of its high dividend yield of 5%/6.0% for 2023/24.

You can find the full report here and the company website here.