2H21: Results Above Expectations
FR’s 2021 results came in above our expectations lifted by higher CPO ASP and better-than-expected downstream contribution. We reckon that the impact of DMO would reflect lower net realised CPO ASP but we still expect upstream to continue to perform with current increasing CPO prices. Downstream margin would remain stable. Revise earnings on the back of higher CPO assumption of RM4,200/tonne and downstream margin. Upgrade to BUY with a higher target price of S$2.10.
RESULTS
• Results above expectations. First Resources (FR) reported its 2H21 core net profit at US$119m (+>100% qoq, >+100% yoy), bringing 2021 core net profit to US$149m (+54% yoy). The results are above our and consensus expectations on the back higher crude palm oil (CPO) ASP and better-than-expected downstream contribution.
• Strong upstream hoh and yoy in 2H21, mainly lifted by its strong upstream performance from its higher average ASP and better sales volumes. The higher sales volume in 2H21 was also driven by a net inventory drawdown of 50,000 tonnes and higher purchases of third-party CPO.
• Downstream operation performed well too. The refining and processing segment had improved by >100% qoq and 96% yoy in 2H21 on the back of higher sales volume and the reduction in export levies effective 2 Jul 21 by the Indonesian government.
STOCK IMPACT
• FFB production guidance for 2022. 2021 fresh fruit bunch (FFB) nucleus production was at 2.94m, slightly lower than our full-year estimate of 2.98m, whereby we reckon the variance was mainly due to the high rainfall in Indonesia in 4Q21. Management guided its FFB nucleus production growth guidance at 0-5% yoy for 2022, supported by a recovery in production as well as higher yield.
• Fertiliser application is behind schedule. Management had mentioned that fertiliser application for 2021 was behind schedule (80% from its initial target), mainly attributed to the wet weather.
• Impact from domestic market obligation (DMO). FR’s upstream would be the one taking an impact from the new Indonesia ruling on exporters to fulfil domestic cooking oil. The upstream is obliged to supply certain amounts of CPO from its nucleus production at the stipulated price of Rp9300/kg vs market price of around Rp17,000/kg. Thus, the full-year net realised price for upstream could come in much lower than ASP. Fortunately, FR has its own downstream operation which can take the low priced CPO to be further processed into olein and sell to domestic cooking oil producers in order to secure an exports licence.
EARNINGS REVISION/RISK
• Revised earnings forecast. We had revised up our earnings forecast by 24% for 2022, factoring in high CPO price assumption of RM4,200/tonne but this resulted in lower net realised selling price after the impact of DMO. We had also adjusted our downstream margin slightly higher as it is benefitting from the limited supply in Indonesia as well as the Indonesian export levy structure.
VALUATION/RECOMMENDATION
• Upgrade to BUY with higher target price of S$2.10 (previous: S$1.65). The valuation is pegged at 11x 2022F PE, which is 2SD below the stock’s five-year average mean.
• Proposed a final dividend of S$0.051/share (div yield: 2.9%), bringing total dividend to S$0.0635/share (div yield: 3.6%) vs 2020 of S$0.03/share. FR revised its dividend payout to 50% from 30% previously.
SHARE PRICE CATALYST
• Stronger-than-expected CPO price recovery. FR’s earnings are still largely dependent on upstream contributions, and higher CPO prices are positive to its earnings. With every 10% increase in CPO price, FR earnings would be boosted by 22%.
• Higher-than-expected FFB and CPO production.