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RHB downgrades First Resources to 'sell' following disappointing 1QFY2023 results

The RHB analysts have also slashed their FY2023 to FY2025 earnings forecast by 20%-26%.

RHB Group Research analysts have downgraded First Resources (FR) EB5 to “sell”, lowering their target price to $1.20 from $1.60 previously following the planter’s below-expectations 1QFY2023 ended March results.

In their May 15 note, the analysts point out that FR’s 1QFY2023 net profit plunged 74% y-o-y to US$19.3 million ($25.8 million). This only makes up 8%-9% of RHB’s FY2023 earnings forecast, largely due to lower average selling prices achieved as well as lower fresh fruit bunches (FFB) output.

Excluding the foreign exchange (forex) loss of US$10 million, FR’s core net profit for 1QFY2023 should be at US$29 million, UOB Kay Hian analysts ​​Jacquelyn Yow Hui Li and Leow Huey Chuen highlight. This accounts for about 14% of UOBKH’s full-year assumption, which the analysts deem to be within their expectations.

The lower sales volume recorded during the quarter was due to lower biodiesel uptake in Indonesia as well as lower sales for FR’s downstream products, the analysts add. “We reckon that the sales of refining products were not great due to weak margin — sometime in 1QFY2023, refining margin in Indonesia was negative,” they further point out.

The 1QFY2023 margins could have also been affected by higher domestic market obligation (DMO) commitment, Yow and Leow say. The Indonesian government increased the DMO volume by 50% for February to April this year. Crude palm oil (CPO) sales under DMO saw a much lower margin as domestic pricing obligation was lower than market price in 1QFY2023.

That said, RHB analysts say that FR’s downstream margins have returned to “healthy” levels in 1QFY2023 to a positive territory. This is likely due to the full-quarter impact of the end of the tax holiday in mid-November 2022.

“This should remain so for the next few quarters, given Indonesia’s competitive edge over Malaysia now for downstream products. To be conservative, we cut downstream margins for FY2023 to FY2025 to reflect a more gradual recovery,” the analysts add.

With lower fertiliser pricing, FR’s upstream margin is expected to improve h-o-h in 2HFY2023, as current fertiliser prices have declined by about 50% versus December. With the decline of fertiliser prices and fuel costs, UOBKH analysts expect FR’s 2HFY2023 operating margin to improve. This is in line with the analysts’ in house view that CPO prices may trade higher in the second half of the year.

In terms of production, FR’s 1QFY2023 FFB nucleus output met just 20% of Maybank’s full-year forecast. FR is keeping its 0% to 5% y-o-y FFB growth forecast for FY2023 while its unit cash cost guidance is unchanged at US$280-US$300 per tonne. This is on the back of higher fertiliser price and application. Analyst Ong Chee Ting notes that FR has made little-to-no forward sales for the rest of FY2023.

After imputing lower palm kernel prices, lower downstream margins and higher unit costs as well as updating their latest in house forex assumptions, RHB analysts slash their FY2023 to FY2025 earnings forecast by 20%-26%.

UOBKH analysts are keeping their “hold” call on FR with a lower target price of $1.55 from $1.85 previously. This is pegged to 9x FY2023 P/E.

Meanwhile, Maybank’s Ong has kept his “buy” call and target price of $1.85, expecting stronger earnings in the coming quarters and more pronounced recovery in the second half of the year.

As at 2.21pm, shares in FR are trading at an unchanged $1.39.

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