BUY for Its Attractive Dividend Yield of > 4%

• We expect much stronger 2H21 PATMI on better h-o-h FFB output and CPO prices, and still good downstream margins. First Resources (SGX:EB5)'s 1H21 core PATMI was off to a slow start due to low CPO ASP achieved due to forward sales committed earlier. Following our industry-wide CPO price upgrade, we have raised our FY21-23E EPS by 6%/4%/4% respectively.
• Maintain BUY with a new target price of S$1.81 on rolled forward 14x FY22 PER pegged at -1 standard deviation its 5-year mean on slowing growth prospects (previously S$1.88 on 17x FY21 PER, its 5-year mean).
• First Resources announced a 1st interim dividend of S$0.0125.

No Surprises to 1H21 Core PATMI

• First Resources' 1H21 core PATMI of US$30m (-28% y-o-y) met 23%/21% of our/consensus full-year estimates. Despite a slow start, we consider it to be within our/ consensus expectations as the weak 1H performance was mainly due to higher-than-expected export duties payable on roughly 70% of 1H21’s output that was locked-in towards end-2020 when CPO price was still uptrending, and before the Indonesian government introduced its punitive progressive export tax structure.
• 1H21 CPO ASP achieved was just US$459/t (-17% y-o-y) vs our estimated market price of ~US$722/t. 1H21 plantation EBITDA fell 20% y-o-y to US$84m.
• Meanwhile, its downstream EBITDA jumped 160% to US$26m on favourable margins.

Output Growth May Exceed +5% Y-o-y in 2021

• The impact of weaker CPO ASP achieved in 1H21 was mitigated by higher FFB nucleus production (+10% y-o-y).
• For the full year, First Resources is keeping its 0- 5% y-o-y FFB growth rate (MKE: +5% y-o-y) although it hopes that growth may exceed the upper range. However, unlike historical 1H:2H output ratio of 43:57, 2021 may come in around 45-47: 53-55.

A Meaningful Percentage of 2H Output Is Unhedged

• A meaningful percentage of its 2H output has not been sold forward. First Resources is expected to enjoy better h-o-h CPO ASP in 2H, partly boosted by the favourable revision in export tax structure that came into effect on 2 July. To top it up, First Resources has a net inventory build-up of 20,000t in 1H21, which may translate to higher sales and profits in 2H21.

Raising Our 2021’s CPO ASP to MYR3,500/t

• We recently revised up our industry-wide CPO price assumptions. We raised our 2021’s CPO ASP to MY3,500/t (from MYR3,100/t) and 2022-23’s CPO ASPs to MYR2,800/t (from MYR2,600/t) respectively. The higher CPO ASPs reflect the tighter-than-expected supply of palm oil, and global oils and fats. Malaysia and Indonesia’s palm oil production in 2021 have thus far came in below industry’s expectation, necessitating higher prices to help ration demand.

Source: Maybank Kim Eng Research - 16 Aug 2021