1Q22: Results Slightly Above Expectations
FR’s 1Q22 results came in slightly above expectations mainly due to strong ASP
despite lower qoq sales volume. We expect 2Q22 earnings to be lower qoq, dragged by
the impact from Indonesia’s export ban which resulted in lower CPO ASP, refining
margins and sales volume. We have revised our earnings forecasts, factoring in higher
CPO ASP assumptions but slightly muted by higher export duties and levies and lower
downstream margins. Downgrade to HOLD with a higher target price of S$2.30.
RESULTS
• Results above expectations. First Resources (FR) reported 1Q22 net profit of US$73.6m
(+738.5% yoy), on the back of a 54.1% yoy increase in sales to US$303.5m. Results came
in slightly higher than our expectations mainly supported by strong ASP, especially from
palm kernel despite lower qoq sales volume.
• Lower qoq results were due to the impact from domestic market obligation (DMO) which
has slowed the exports sales and lowered ASP due to the commitment to domestic price
obligation (DPO). As a result of lower sales volumes, 1Q22 recorded a net inventory build-up
of 31,000 tonnes despite lower production.
• We expect 2Q22 earnings to be lower qoq, mainly due to:
a) Lower CPO ASP and sales volume, dragged by the Indonesia export bans. Since the
announcement, Indonesian domestic CPO prices have dropped 20-25%. FR had guided
that delivery have been paused/rescheduled but does not expect to incur any significant
holding cost. With the assumption that the export ban would not last long, FR has put
most of its delivery on hold where its storage tank can still sustain for another 1-2 months.
b) Lower total FFB processed. The fresh fruit bunch (FFB) prices from external
smallholders have fallen around 50-75% where most of the Indonesian players are trying
to keep their storage tank capacity for their internal FFB usage.
STOCK IMPACT
• Downstream margin may be squeezed. As export sales have been halted for the time
being and coupled with the limited storage capacity, refining operation would have to be
reduced which would result in a low utilisation rate and lower downstream margin. Even
though FR would be able to convert some of its CPO into other items that can be exported
(eg stearin and palm fatty acid distillate), we reckon that the sales volume would be small.
• Impact from exports ban is affecting cash flow if sales continue to be held up due to
the ban. As mentioned, local sales are slow while the exports market is temporarily closed,
which means short-term cashflow could be affected for most of the palm players in
Indonesia. FR is in a better position, ie still being able to generate operating cashflow from
the sales of biodiesel (25% of its CPO production) to fulfill the local mandate and export the
balance of the palm products that are not subjected to the ban (approximately 20% of the
palm value chain).
• Secured 60-70% of its 2022 fertiliser. FR had procured 60-70% fertiliser for 2022, where
there would be another tender in Jun 22. The fertiliser prices that FR had locked in have
increased about 60% yoy, whereas the upcoming tender prices are expected to increase
further. Despite FR securing its fertiliser, there are still some delays in its fertiliser delivery in
1Q22, where we believe that it was mainly due to logistic issues.
EARNINGS REVISION/RISK
• Revised earnings forecasts. We had revised up our earnings forecasts by 10%/25% for
2022/23, factoring in: a) higher CPO assumptions of RM5,200/tonne and RM4,000/tonne
respectively (previous: RM4,200/tonne and RM3,000/tonne), b) higher export levy and duty,
and c) lower downstream utilisation rate.
• Our net profit forecasts for 2022-24 are at US$247m, US$229m and US$231m respectively.
VALUATION/RECOMMENDATION
• Downgrade to HOLD despite a higher target price of S$2.30 (previous: S$2.10) where
we reckon that the current share price have already factored in the stronger yoy CPO prices
for 2022. With the uncertainty from Indonesian policies and the impact from the current
export bans, we had downgraded to stock from BUY to HOLD.
SHARE PRICE CATALYST
• Stronger-than-expected CPO price recovery.
• Higher-than-expected FFB and CPO production.
• Changes in Indonesia’s policy.