First Resources to clear inventory build-up in 2HFY2022, RHB maintains 'neutral'

RHB believes First Resources is fairly valued, trading at 7x 2023 P/E — in line with its peer range of 6x-11x.

RHB Group Research analysts maintain their “neutral” call on First Resources, expecting the company to clear its high inventory build-up in 2HFY2022.

In their Aug 12 report, the analysts explain that the company has an inventory build up of 131,000 tonnes in 2QFY2022 — much higher than 1HFY2021’s 20,000 tonnes. This was due to the export ban impact and export permit issues in May and June.

First Resources expects to only be able to normalise inventory by year’s end due to the logistics backlog in the country.

For 1HFY2022, First Resources’ fresh fruit bunches (FFB) production dropped 2.1% y-o-y, lower than its 2.7% growth projection and management’s 0%-5% guidance for FY2022.

“First Resources is maintaining its FFB growth guidance, as it has seen production picking up strongly in 3Q. Meanwhile, the slight labour shortage issue faced in 1HFY2022 has been relatively resolved. We keep our FY2022-FY2023 growth assumptions at 2%-5%,” the analysts add.

Unit costs are expected to rise 10%-15% y-o-y to US$270-US$290 per tonne in FY2022 due to higher fertiliser costs. The analysts point out that First Resources only applied 35% of its fertiliser requirements in 1HFY2022 so far given the hot weather in 2Q, but hopes to catch up on application in 2H.

On the back of the wide tax differential between crude palm oil and processed palm oil, First Resources’ downstream margins rose to 11.3% in 1HFY2022. This margin is likely to narrow in 3Q given the two month tax levy holiday. Once this ends, margins could be improving again in 4QFY2022, the analysts add.

RHB kept its target price for First Resources at $1.50. The analysts believe that the stock is fairly valued, trading at 7x 2023 P/E, in line with its peer range of 6x-11x.

As at 3.34pm, shares in First Resources are trading 3 cents higher or 1.96% up at $1.56.

 

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