• Still NEUTRAL and SGD1.45 TP, 5% upside with c.5% FY24F yield. 2Q24 results were largely in line with our expectations. Going into 2H24, productivity should improve while costs decline, but downstream margins could reverse back to the red unless policy changes are instituted. First Resources’ valuation remains fair – it is trading at 9.3x 2025F P/E – at the higher end of its peer range of 6-11x.

• FR recorded a 45% QoQ (+88% YoY) surge in core net profit in 2Q24. This came in largely in line with our and Street’s forecasts – at 53% and 49% of FY24 estimates – on higher FFB production volume and the downstream segment returning to the black. The company declared an interim DPS of 3.5 sen, in line with expectations.

• Analysts briefing highlights:

  i. 2Q24 FY24 nucleus FFB production rose by 11.7% QoQ (+6.4% YoY), bringing 1H24 FFB output growth to 6.7% YoY. This was above management’s guidance of c.5% and our forecast of 3.5% growth for 2024. Weather conditions have normalised and FR is expecting output to see the normal seasonal peak in 3Q24. However, it maintains its FY24 FFB growth assumption at 5%. We make no changes to our conservative FFB growth assumptions of 3.5%, 3.9%, and 2.7% YoY for FY24-26;
  
  ii. FR recorded a 1H24 net inventory drawdown of 44,000 tonnes. However, despite this and the higher CPO output of +5.8% YoY, CPO sales volumes declined 2.6%. This was due to lower external purchases of PO;
  
  iii. Unit costs decreased QoQ in 2Q24 thanks to higher productivity. We expect the decline in costs to persist on seasonal trends and lower fertiliser costs – recall that FR secured its FY24 fertiliser requirements at prices that were 30% YoY lower. As such, it is maintaining its FY24 unit cost guidance at USD280-300/tonne (-8% to -15% YoY). FR applied c.40% of its fertiliser requirements in 1H24 and expects to be able to catch up in 2H24. We maintain our unit cost assumptions;
  
  iv. Refining margins returned to the black in 2Q24. The firm saw a QoQ improvement in downstream margins in 2Q24, bringing 1H24 margins to 2.6% (2H23: -4.9%). This came from higher ASPs and an elevated utilisation rate of 70% in 2Q24 from 1Q24’s 20%. However, since then, margins have reversed back to the red on declining ASPs. Going forward, margins direction will depend on the Indonesian Government’s new domestic market obligation (DMO) policy, which could potentially see an increase in the DMO ceiling price and, hence, margins.

• Keep NEUTRAL with an unchanged SGD1.45 TP based on 11x 2025F P/E, which incorporates an 8% ESG discount. We make no changes to earnings.

Source: RHB Research - 15 Aug 2024

Source: RHB Securities Research - 15 Aug 2024