First Resources - Maybank Research 2022-07-04: Upgrade To HOLD As Negatives Largely Priced-In


First Resources - Upgrade To HOLD As Negatives Largely Priced-In

Government achieved its target to bring down CPO price

  • We cut First Resources's target price to S$1.62 on lowered 10x FY23 P/E, its -1.5 standard deviation 5-year mean (previously S$1.94 on 12x FY23 P/E, its -1 standard deviation 5-year mean) due to Indonesia’s regulatory risk.
  • Nonetheless, we believe First Resources’s recent share price sell-off has largely priced in the regulatory risk relating to continuing uncertainty with regards to its export policy. As the government has achieved its target, this should limit further downside risk from hereon.
  • With current First Resources's share price in line with revised target price, we upgrade First Resources (SGX:EB5) to a HOLD (from SELL).

CPO price has given up all gains for the year

  • Bursa Malaysia Derivatives (BMD)’s 1-month Crude Palm Oil Futures (FCPO) price is down to just MYR4,897/t on 1 July, which is 40% below the peak price on 1 March.
  • The correction came earlier than we expected due to the following factors:
    1. Indonesia lifted its export ban on 23 May leading to anticipation of a sudden gush in available global palm oil supplies as oil tanks are reportedly “overflowing” now;
    2. to top that, there is also expectation of a seasonal pick up in CPO output in 2H22;
    3. Northern Hemisphere crop planting has progressed well due to conducive weather, fuelling concern over potentially strong y-o-y rebound in crops; and
    4. recent aggressive interest rate hike by the US Fed (with potentially more to come) has also dampened overall market sentiment.

Weak domestic CPO price likely to be temporary

  • The situation in Indonesia appears even more dire judging from the recent sharp decline in domestic CPO price that hit record ~2-year low. Last quoted price of MYR2,507/t (on 28 June) is 38% below the price at the start of the year in Indonesia, and at MYR2,652/t discount to Malaysian CPO price.
  • But we reckon this is just temporary as Indonesia’s domestic price should recover when domestic stockpile normalizes or as soon as end-July/ early Aug when Indonesia’s export taxes (which are revised monthly) are cut to reflect the present lower global CPO prices.

Keeping our earnings forecasts

Ong Chee Ting CA Maybank Research | https://www.maybank-ke.com.sg/ 2022-07-04
SGX Stock Analyst Report HOLD MAINTAIN SELL 1.62 DOWN 1.940