• Still NEUTRAL, new SGD1.45 TP from MYR1.40, 2% upside with c.5% FY24F yield. First Resources’ 1Q24 results were slightly below expectations, mainly due to higher-than-expected losses at its downstream segment. In FY24F, productivity should improve and costs decrease, but downstream margins may remain under pressure. The stock’s valuation remains fair – it is trading at 9.4x 2024F P/E – at the higher end of its peer range of 7-11x.

• FR recorded a 58% QoQ and 87% YoY surge in net profit in 1Q24 to USD36.1m. This came in slightly below our and Street forecasts (at 20% and 19% of FY24 estimates), likely due to higher-than-expected losses incurred by its downstream segment.

• Analyst briefing highlights:

  i. 1Q24 FY24 nucleus FFB production dropped by 20% QoQ but rose 7.1% YoY. This is above management’s guidance of c.5% and our forecast of 3.5% growth for 2024. Weather conditions have somewhat regularised since February, and FR is expecting output to continue improving from 2Q24 onwards, before peaking in 3Q24. We make no changes to our (conservative) FFB growth assumptions of 2-4% YoY for FY24-26F.

  ii. FR recorded a net inventory drawdown in 1Q24 of 28,000 tonnes in 1Q24, which led to higher sales volumes booked during the quarter. Inventory levels returned to normal levels in end-March.

  iii. Unit costs likely rose QoQ in 1Q24 on the back of lower productivity. However, this should moderate in the coming quarters due to lower fertiliser costs as FR has secured its FY24 fertiliser requirements at prices that are 30% lower YoY. As such, FR is maintaining its unit cost guidance for FY24 at USD280-300/tonne (-8-15% YoY). FR applied about 20% of its fertiliser requirements in 1Q24. We maintain our unit cost assumptions.

  iv. Refining margins remained negative in 1Q24. Management has not seen any marked improvement in downstream margins in 1Q24, given the still- weak demand from its destination markets, while competition from other CPO producers is heating up. Going forward, management highlighted that refining margins will only turn positive if prices move up and demand improves. We note that its utilisation rate has also declined significantly to 20-25% in 1Q24 (from > 50% in 1Q23). This was also likely due to FR shifting its sales mix ratio of CPO:refined product volume to 40:60 in 1Q24 (from < 10:90 in 1Q23). We have toned down our downstream utilisation and margin assumptions accordingly, for FY24-26F.

• Keep NEUTRAL, with a slightly higher SGD1.45 TP, based on a higher 2024F P/E of 11x (from 10x previously) as we update the historical peer range. We trim FY24F-26F earnings by 2-7%, in tandem with our paring down of forecasts for its downstream numbers. Our TP includes a 12% ESG discount.

Source: RHB Research - 16 May 2024