First Resources - UOB Kay Hian 2023-03-02: 4Q22 Results Within Expectations

• First Resources has turned net cash with its record-high profit, and also declared a historically high total dividend of $S0.145/share for 2022, translating to a dividend yield of 8.8%.
• Downgrade First Resources to HOLD with a lower target price of S$1.55 after adjusting for lower FFB yield and trimming downstream margin.
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First Resources' 2H22 results within expectations.

• First Resources (SGX:EB5)’s 2H22 core net profit came in at US$197m (+43% h-o-h, + 65% y-o-y), higher h-o-h on the back of strong sales volume (+175% h-o-h) and better CPO ASP (+5.9% h-o-h). This brought 2022 core net profit to US$334m (+124% y-o-y), which is in line with our full-year forecast. 4Q22 core net profit came in lower q-o-q due to lower CPO ASP.
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• 2022 earnings were higher y-o-y, mainly lifted by higher CPO ASP, which increased 47% y-o-y. We reckon that First Resources’s CPO ASP was higher than their peers, which we attribute to First Resources’s strong marketing strategy. This is First Resources’s highest ever core net profit since its listing.
• Highest EBITDA per nucleus CPO sold despite rising cost in 2022. Thanks to the strong CPO ASP that First Resources achieved, the company achieved its highest EBIDTA per nucleus CPO sold despite the rising costs in 2022.
• Turned net cash. As expected, First Resources had turned net cash as of Dec 22 due to the strong cash flow-generating upstream operation. This translates to S$0.12/share.
• RSPO certification updates. In 2022, First Resources received Roundtable on Sustainable Palm Oil (RSPO) certifications for four mills, covering 40,263 ha of plantations in Riau. As at end-Dec 22, eight of their subsidiaries covering six mills and more than 59,000 ha of plantation in Riau and East Kalimantan (representing 34% of the group’s nucleus planted area) were certified under RSPO. First Resources is committed to progressing its certification process and achieving 100% RSPO certification by 2026.
• 2023 earnings to be lower y-o-y mainly due to:
  1. CPO prices trending down. Indonesia’s local CPO selling prices remain high currently at Rp12,900/kg, due to the current tight production. Having said that, we expect CPO prices to weaken in 2H23 once the market realises there may be a sudden boom in production brought about by the impact of La Nina.
  2. Cost of production remains high. First Resources guided that it might apply more fertiliser in 2023, given the delay in their fertiliser application in 2022 caused by heavy rains (especially in 4Q22). Hence, cost of production would still remain high in 2023. However, we expect upstream margin to improve h-o-h in 2H23 with the lower fertiliser pricing, as current fertiliser prices have declined by about 40% vs 2H22. Note that companies usually buy their fertiliser semi-annually by securing their fertiliser six months ahead of application.
  3. Lower downstream margin. With the absence of the strong disparity between crude palm oil and refined palm oil prices, we expect downstream margin to come in lower y-o-y in 2023, but still remain high as compared with historical average.
• FFB production growth to range between 0-5% y-o-y. First Resources has guided for nucleus FFB production growth to range between 0-5% on the back of better yield.

First Resources – Earnings forecast revision & recommendation

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Jacquelyn Yow Hui Li UOB Kay Hian Research | Leow Huey Chuen UOB Kay Hian | https://research.uobkayhian.com/ 2023-03-02 SGinvestors.io

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