• After imputing our revised CPO price assumptions, we have cut our First Resources (SGX:EB5)'s earnings for FY20F by 17%. Despite the lower CPO price environment, we believe First Resources share price correction has already reflected the risk of lower prices, as valuations are already below 1SD of historical mean.

Our Worst Case Scenario for Demand Is Still a Possibility

• Our worst case scenario for demand is still a possibility, if COVID-19 is not contained until the year-end and crude oil prices do not recover in 2H20, as projected by our in-house crude oil forecasts. Please refer to our recent report: Plantation - RHB Invest 2020-03-11: COVID-19 + Crude Oil = Correction.
• Currently, at a palm oil and gasoil futures or POGO price gap of USD37/barrel, it results that biodiesel demand in Indonesia could be short by 2.1m tonnes (instead of the 1.4m tonnes we had originally projected). This could mean that the worst case scenario is for CPO stock/usage ratio to rise to 24.4% from 18.6% in 2019. Based on historical guidelines, this could imply that CPO prices could fall to between MYR2,000-2,200/tonne.

Our In-house Assumption Currently Is for COVID-19 to be Under Control Within 1H20

• Our in-house assumption currently is for COVID-19 to be under control within 1H20, which means our second scenario (Scenario2) is more probable. It assumes a 10% decline in demand from EU, the US and China as well as a 2.1m tonne decline in biodiesel demand in Indonesia, or a total 3.8m tonne decline in CPO demand. Therefore, we estimate an increase in CPO stock/usage ratio to 20.1% (from 18.6%).
• Based on historical data, CPO prices ranged between MYR2,200.00 and MYR2,400.00 per tonne, when stock/usage ratios were at these levels in 2011 and 2018.

We Are Cutting Our CPO Price Forecasts to MYR2,400/tonne for 2020

• We are cutting our CPO price forecasts to MYR2,400/tonne for 2020 (from MYR2,600), while leaving intact our MYR2,500/tonne forecast for 2021 and 2022. We have also adjusted our FX assumptions to be in line with our latest in-house assumptions. With this reduction in prices, we have cut the earnings for FY20-21F by 3-17%.

Maintain BUY

• Maintain BUY with a lower SOP-based Target Price of SGD1.20 (from SGD2.00) with a lower 2020F P/E target of 12x (from 17x).
• We lower the target P/Es for the plantation companies to reflect the lower peer valuations, while our target P/E is more than 1SD below its 5-year historical mean. This implies an EV/ha of USD12,000 , in line with its peers’ USD5,000-15,000 range.

Source: RHB Invest Research - 24 Mar 2020