Still NEUTRAL, higher SGD1.75 TP from SGD1.50, 3% upside. 9M22 numbers came in strongly above expectations, as First Resources benefited from the tax levy holiday and forward hedges. Given yesterday’s positive share price reaction, we deem valuations as fair – trading in line with its 5-9x peer range. Nevertheless, dividend yield at 50% payout should lend support, implying 9% FY22F yield.
9M22 earnings rose 205.8% YoY, exceeding expectations at 92-94% of our and Street’s FY22F earnings on the tax levy holiday impact, forward hedging gains, lower-than-expected unit costs, and effective tax rate.
Briefing highlights:
i. 9M22 nucleus FFB production rose 2.9% YoY, in line with our 2.7% growth projection and management’s 0-5% guidance for FY22. 3Q FFB output saw a strong recovery of 19.7% QoQ (+11.8 YoY) despite the wetter-than-expected weather. While the floods have subsided in most parts of FR’s Kalimantan estates, the weather is still wetter than usual. As such, it is maintaining its FFB growth guidance for FY22. We keep our FY22-23 growth assumptions at 2-5%;
ii. High inventory build-up not disposed in 3Q22. As at end-3Q22, the inventory build-up was at 117k tonnes, not much lower than 2Q22’s 131k tonnes. FR expects to only be able to normalise inventory by year’s end;
iii. Tax levy holiday impact. It benefitted from the tax levy holiday in 3Q22 – forward sales volumes contracted earlier during the high tax period got executed when levies were zerorised, thereby recording an additional gain. However, now that the taxes have been reinstated since mid-Nov 2022, the opposite applies, where losses can be booked instead. While FR does not reveal its forward hedging stance, it did state that it continues to hedge forward, albeit at only 2-4 weeks ahead;
iv. Fertiliser application slow, resulting in lower unit costs. FR has lowered its FY22 unit cost guidance to USD250-270/tonne (+5-8% YoY) from USD270-290/tonne. This is due to slower fertiliser application, as it is unlikely to complete its targeted application for this year. We understand fertiliser application is not much more than the 35% applied at end 1H22 due to the wet weather and labour shortages;
v. Downstream margins fell QOQ in 3Q22 on the smaller tax differential between CPO and PPO due to the tax levy holiday. However, once this ends, we could see margins improving again.
We up our forecasts by 8-23%for FY22-24F after imputing the impact of the tax levy holiday, and lower unit costs and effective tax rates.
Maintain NEUTRAL. Our TP is raised to SGD1.75 based on an unchanged 8x 2023F P/E – in line with its peers. This includes an 8% ESG discount, given its ESG score of 2.6.
