First Resources - DBS Research 2021-02-02: Great Bargain For Prime Performance


First Resources - Great Bargain For Prime Performance

  • Recent share price correction is an opportunity to accumulate First Resources (SGX:EB5).
  • Trading below its 5-year average P/E multiple despite potential to churn above average yield and profitability.
  • Raise First Resources' target price to S$1.83 and maintain our BUY rating.

Share price has been performing well since November 2020 – we believe there is more to go

  • First Resources share price has rebounded 27% amid the CPO price recovery trend since November 2020 and we believe there is room to further rise since the market has not priced in First Resources’s above average CPO yield and net profit margin. First Resources's current P/E multiple is below its Indonesia and Malaysia listed peers at above 17x.
  • Despite the recent pull back in CPO prices from a record high of US$1,000 per MT, in the long run, we believe CPO prices will trade above US$620 per MT on structurally tight supply and demand dynamics , since palm oil supplies have limited room to expand further and catch-up with growing demand, due to slower than expected replanting programme and poor fertiliser application mainly among Indonesia’s estates. Please see report: Regional Plantation Companies : Undemanding valuations amid improving supply-demand trend.
  • The positive long-term CPO price outlook bodes well for First Resources , given that its estates are at a prime age of 13 years. First Resources’s estates are now on a high yield productivity cycle thus, enabling First Resources to churn higher profitability and ROE performance than its peers. Hence, we believe First Resources is the best proxy for investors to ride on the structural CPO price recovery trend going forward.

Raise First Resources FY21F earnings forecast by 5%

  • We raise our First Resources's FY21F earnings forecast by 5% to US$134m (+11.3% y-o-y) driven by higher than expected domestic palm oil price trend (at around US$710 per MT) in Indonesia especially in Dec-Jan 2021 which bodes well for First Resources’s ASP in 1Q21. We reiterate our FY21 CPO price forecast of US$617 per MT.
  • Beside the higher palm oil price , we believe First Resources will continue to churn above average profitability performance due to its palm oil estates reaching the prime age cycle.
  • Our CPO ASP assumption has factored in Indonesia’s progressive export levies which is designed to support the national Biodiesel B30 program amid current high palm oil prices, and sub US$60 per bbl Brent crude oil prices.
  • We expect First Resources to deliver a strong 2020 finish; earnings should jump 32.6% from 2019’s low base despite COVID-19 impact in 1H20. Based on our full year earnings forecast of US$118m, we estimate First Resources's 4Q20 earnings will come in at US$38m (+18.7% y-o-y, flat q-o-q) mainly attributed to the 4Q20 palm oil prices which positively affects First Resources’s CPO ASP, especially for those sold on spot prices.

Raised First Resources' target price of S$1.80

William Simadiputra DBS Group Research | Woon Bing Yong DBS Research | https://www.dbsvickers.com/ 2021-02-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.83 UP 1.700