• Maintain NEUTRAL, new SGD1.40 TP from SGD1.45, 1% downside. First Resources’ FY23 results were in line with our and Street expectations. Going forward, while productivity should improve and costs reduce, downstream margins could remain under pressure in 2024. Valuation remains fair, as the stock is trading at 9x 2024F P/E – at the higher end of its peer range of 6-9x.

• FR recorded a 55% QoQ decline in net profit in 4Q23, resulting in a 49% YoY drop in FY23 earnings to USD165.1m. This came in largely in line with our and Street’s forecasts at 102% and 98% of FY23 estimates.

• FR declared a 3.7 SGD cents final DPS, bringing FY23 DPS to 6.2 SGD cents, or a net payout of 50% and net yield of 4.5% for 2023.

• Briefing highlights:

  i. 4Q23 FY23 nucleus FFB production dropped by 8% QoQ (+15.7% YoY), bringing FY23 FFB to 0.5% YoY – in line with management’s flattish growth guidance for last year. FR is expecting up to a 5% output growth for 2024, as weather conditions have somewhat regularised since Feb 2024.

  ii. Small inventory build-up in FY23. As at end FY23, FR had an inventory
  build-up of 11,000 tonnes vs 40,000 tonnes in FY22. This was due to timing issues – it should be cleared by 1Q24;
  
  iii. Unit costs to decline in 2024. FR applied about 90% of its fertiliser
  requirements in 2023 (up from 60% in 9M23). Unit costs in FY23 were at USD327/tonne (+18.5% YoY) coming from higher fertiliser costs. For FY24, FR expects fertiliser costs to come down by 20-25% YoY, leading to unit costs declining to USD280-300/tonne (8-15% YoY);
  
  iv. Downstream margins remained negative in 2H23 at -4.9%, albeit an
  improvement from 1H23’s -7.1% due to weak demand and increased competition. Going forward, management highlighted that refining margins would only turn positive if prices move up and demand improves. However, biodiesel margins should improve in 2024 on higher glycerine prices. We bring down our downstream margin assumptions accordingly.

• Keep NEUTRAL with a slightly lower SGD1.40 TP. We bring down our FY23F-25F earnings down slightly by 1-9% as we trim our downstream margin assumptions. We do raise our FFB growth assumptions. Our TP includes a 10% ESG discount based on FR’s 2.5 ESG score.

Source: RHB Securities Research - 29 Feb 2024