Upgrade to Add for its dividend appeal
- 1H22 core net profit soared 738% yoy to US$134m, above our expectation.
- We project flattish hoh earnings as higher sales volumes offset lower ASP.
- Upgrade to Add due to attractive dividend yield of 5-7.5% for FY22-23F.
1H results above; better refining margin offset inventory build-up
First Resources (FR) posted a 738% yoy jump in 1H22 net profit to US$134m, thanks to higher CPO price achieved and downstream margins, which more than offset the impact from the export ban. We consider the 1H22 net profit to be above our expectation, at 56% of our full-year forecast but broadly in line with Bloomberg consensus’s at 53%, driven mainly by better-than-expected downstream processing margin of US$58/tonne in 1H22 and higher-than-expected average PK prices achieved (+63% to US$803/tonne). In 1H22, FR posted a 30% rise in revenue despite a 7% decline in CPO output and a net inventory build-up of 131,000 tonnes during the period at both its estates and refineries. We deduce that the average CPO price achieved in 1H22 was US$837/tonne (+82% higher yoy), more robust than the 43% yoy rise in 1H22 average Indonesia CPO price of US$1,025/tonne, as the group used up significantly higher-than-normal forward sales locked in at end-2020 for its CPO sales in 1H21. Qoq, we estimate reported net profit fell by 27% to US$54.4m. An interim dividend of S$0.025 per share was declared, representing a dividend payout of 21% of underlying profit and interim dividend yield of 1.7%, within expectations. Other notable takeaways were that its 1H22 FFB output from nucleus estates fell 2% yoy due to a high production base in 1H21. However, FR maintained its guidance for 0-5% FFB output growth and increase in cost of production to US$270-290/tonne in 2022F from US$250/tonne in 2021 due to higher fertiliser costs (+60% yoy in FY22F). FR said its fertiliser application in 1H22 was behind target at 35% of annual budget. CPO output for 1H22 fell by 6.6% due to lower purchase of third party fruits.
Upgrade to Add due to its strong dividend yield of 7.5%
We project FR to post flattish hoh earnings in 2H22F as we expect higher sales volumes (from build-up in stocks due to export ban) and FFB output to offset lower CPO prices and higher operating costs. FR said it expects palm oil inventory in Indonesia to normalise by Sep as demand for palm oil is healthy and as the palm oil export policy has been relaxed. However, this will likely be offset by lower current CPO and PK prices. Indonesia CPO price was US$746/tonne as at 11 Aug vs. US$1,025/tonne in 1H22. We raise our FY22- 24F net profit forecasts by 0.2-13.1% to reflect lower export tax and levy (following recent revisions), better downstream margin and lower effective tax rate. We expect FR to post an 85% jump in its FY22F net profit, driven mainly by higher CPO price achievement. We cut our TP by 16% to S$1.76, now based on 2023F P/E of 11.6x (-1 s.d. from historical 10- year avg P/E) vs. 16x P/E previously to reflect the group’s earnings and CPO price likely peaking in FY22. As the stock has declined 27% since our last update on 16 May, FR’s P/E valuations and dividend yields are attractive at 6.5x FY22 P/E and 7.7%. We upgrade to Add and see share price support from its EV/ha of US$10,087.