• Maintain NEUTRAL and SGD1.50 TP, 5% upside. We consider the 1H22 results to be in line with expectations, as we expect First Resources to clear its high inventory build-up of 131,000 tonnes in 2H22. We believe FR is fairly valued, trading at 7x 2023F P/E – in line with its peer range of 6-11x. Nevertheless, dividend yield at 50% payout should lend support, implying 8.5% FY22F yield.

• 1H22 net profit rose 617.8% YoY to USD130.9m. We consider this to be in line, making up 47-49% of our and Street’s FY22F earnings. This is due to the large inventory build-up in 2Q22. FR declared an interim DPS of 2.5 cents (1H21: 1.3 cents).

• Briefing highlights:

  i. 1H22 nucleus FFB production dropped 2.1% YoY, lower than our 2.7% growth projection and management’s 0-5% guidance for FY22. FR is maintaining its FFB growth guidance, as it has seen production picking up strongly in 3Q. Meanwhile, the slight labour shortage issue faced in 1H22 has been relatively resolved. We keep our FY22-23 growth assumptions at 2-5%;

  ii. High inventory build-up to be disposed in 2H22. We highlight that there was an inventory build-up of 131,000 tonnes in 2Q22 – much higher than 1H21’s 20,000 tonnes. This was due to the export ban impact and export permit issues in May/June. FR expects to only be able to normalise inventory by year’s end due to the logistics backlog in the country;

  iii. Domestic CPO price improved. With the current tax levy holiday, domestic CPO prices have improved to around MYR3,350/tonne (+45% from a month ago). However, once the export levy holiday ends at end August, we could see prices coming back down;

  iv. Unit costs expected to rise 10-15% YoY to USD270-290/tonne in FY22 due to higher fertiliser costs of >60% YoY. FR has only applied 35% of its fertiliser requirements in 1H22 so far given the wet weather in 2Q, but hopes to catch up on application in 2H;

  v. Downstream margins rose to 11.3% in 1H22 (1H21: 6.9%) on the back of the wide tax differential between CPO and PPO. This margin is likely to narrow in 3Q, however, given the 2-month tax levy holiday. However, once this ends, we could see margins improving again in 4Q22. Both the refinery and biodiesel operations were running at close to full capacity in 1H. Note: FR managed to export more biodiesel in 1H22 as biodiesel was not affected by the export ban.

• Maintain NEUTRAL. We make no changes to our forecasts. Our TP is unchanged at SGD1.50 based on unchanged 8x 2023F P/E. This includes an 8% ESG discount – calculated using our proprietary in-house methodology – given its ESG score of 2.6.

Source: RHB Research - 12 Aug 2022