Maintain NEUTRAL, new SOP-based TP of SGD1.50 from SGD2.20, 8% upside. First Resources provides good disclosures in relation to ESG. Efforts have been made to reduce greenhouse gas (GHG) emissions in recent years, but its progress in resources efficiency and obtaining certifications is rather slow. As such, we maintain its 2.6 ESG score. That said, we think FR is fairly valued – it is trading at 7x FY23F P/E, in line with its peer range of 6-11x.
CPO prices have plunged from the unwinding impact of Indonesia’s export ban, as well as fears of recession, which pulled down commodity prices in general. We believe the price decline could have been slightly overdone (-44% in seven weeks) – much more than the decrease in soybean, crude oil and wheat prices (down 31%, 17% and 16%). While regulatory risks still exist, particularly for players in Indonesia, we believe supply concerns will continue to haunt the sector for the rest of 2022 – in view of the logistics backlog in Indonesia and the labour shortages in Malaysia. If these issues are resolved by end-2022, and Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should continue to be a better year for supply and prices should remain under pressure.
ESG concerns are still present, but may have taken a backseat. However, the ESG discounts we previously assigned to valuations are still in place. We have reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement. From our analysis, we highlight that, while better disclosure on ESG-related information has been made over the years, progress in mitigating these issues is rather slow. As a result, we have made some upward revisions to the ESG scores of some planters that have made progress – but highlight that several peers have remained relatively stagnant in their ESG efforts, while others have even reduced disclosures.
We tone down CPO price assumptions. We continue to expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, which would provide support for CPO prices. We trim CPO price assumptions for 2022 to MYR5,100/tonne (from MYR5,300/tonne). For 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could decrease even more. However, support from a ramp-up in biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above MYR3,000/tonne in the medium term. We lower our 2023 estimate to MYR3,900/tonne (from MYR4,300/tonne). Our MYR3,500/tonne assumption for 2024 remains unchanged. As a result, we cut FR’s FY22-24F earnings by 11-17%.
NEUTRAL, with a lower TP of SGD1.50 (from SGD2.20) based on a FY23F P/E target of 8x. Our TP includes an 8% ESG discount based on its ESG score of 2.6, which is below the country median of 3.
