First Resources - RHB Invest 2020-11-02: Raising CPO Prices; Upgrade To BUY

FIRST RESOURCES LIMITED (SGX:EB5)

First Resources - Raising CPO Prices; Upgrade To BUY

We revise our 2020/2021 CPO price assumptions to reflect slightly higher y-o-y prices of MYR2,650/tonne in 2021 from 2020’s MYR2,600/tonne.
We believe First Resources (SGX:EB5)’s valuations have fallen to attractive levels, trading at 10.4x 2021F P/E – below its 13x historical mean. Upgrade to BUY from Neutral with S$1.45 target price, 21% upside.

CPO prices have been very volatile of late, racing past MYR3,000/tonne, falling back below, and, subsequently, swinging up and down by MYR50.00-100.00/tonne daily. Besides the usual supply and demand dynamics, we believe there are three major swing factors that determine 2020 CPO price direction: Soybean prices (tying in with weather issues), crude oil prices (tying in with COVID-19), and Malaysia’s labour issues.

Overall, based on latest Oil World and US Department of Agriculture forecasts, 2021 supply and demand dynamics are set to be relatively balanced – assuming production returns to relative normalcy while demand recovers gradually post COVID-19.
Based on the latest Oil World numbers, both the 17 oils & fats and eight vegetable oil complex are expected to see stock/usage ratio declines in 2021, while the 10 oilseed complex is expected to post a slight increase on bumper soybean crops anticipated from the US. For CPO, the 2021 stock usage ratio is also expected to decline, while SBO’s ratio is anticipated to be flat y-o-y.
With lower stock/usage ratios – particularly for CPO, which is likely to fall to below historical average levels of 17.5% – this likely indicates 2021 CPO prices should remain supported at above MYR2,500/tonne.

Our base case assumptions for our CPO price view are that:
1. La Nina will not worsen and soybean crops will not be significantly affected in the US and South America. This means that soybean prices may see some correction, leading to CPO prices also correcting somewhat in the near term;
2. COVID-19 will be relatively contained in 2021, and our higher crude oil price assumptions will hold for 2021. This would mean that the biodiesel mandate in Indonesia will be adhered to, at least until Oct 2021; and
3. the labour shortage will not be too intense in Malaysia in 2021 (assuming the Government makes some changes to its foreign labour policy) and we expect productivity to improve as per Oil World’s forecasts for Malaysia and Indonesia.

We raise our CPO price assumptions to MYR2,600/tonne for 2020 from MYR2,400 and MYR2,650/tonne for 2021 from MYR2,500. We also update our latest in-house currency forecasts. Our forecasts have been raised by 15-16% for FY20-21 and by 9.5% for FY22.

Despite the earnings rise, we keep our S$1.45 target price for First Resources based on a lower 13x 2021F earnings from 14x. This is on updated 5-year forward P/Es. Given its recent share price retracement, we believe First Resources is looking more attractive at current levels, at 10.4x 2021F.
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Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-02

SGX Stock Analyst Report BUY UPGRADE NEUTRAL 1.450 SAME 1.450