Riding on palm oil price recovery
- Maintain our BUY rating despite lower TP of S$2.0
- Revised FY23F/24F earnings by 29%/16% on lower selling price assumption in 2023 and production volumes in 2024
- Market is overly pessimistic on current CPO price; expect better 2H23 benchmark price of US$920-950 per MT vs. 1H23 870 per MT
- FR is trading in line with its Indonesian peers which have an older age profile of palm oil estates
Riding on palm oil price recovery
Maintain BUY with lower TP of S$2.0
We maintain our BUY rating with 2024 DCF-based TP at S$2.0 (WACC: 11.8% TG: 2%) mainly on lower FY23/24F earnings forecast. Our target price implies 12.5x FY24F PE, which is slightly higher its five-year average PE of 11.4x on recovering earnings outlook next year in 2024F, after a challenging year in 2023, especially in 1H23. We believe FR’s valuation is undemanding for a well-managed, young palm oil assets play which can capitalize on the recovering palm oil price trend better than its peers with older assets.
FR is trading at FY24F PE of 9.5x, which is below its five-year average PE multiple, hence we believe the weaker earnings trend in 1H23 is already well priced in. In addition, we think that the valuation does not reflect the expected CPO price improvement in 2H23 as the general market is focused on the soft CPO price currently. Instead, we believe one should cast their views further on the potential impact of the emerging El Nino that could reduce CPO production and hence lift prices in 2024.
FR was previously hit by changes in Indonesian regulations such as the progressive levies in 2021 and Domestic Market Obligation (DMO) in 2022 but given the stable regulatory framework ahead, we think FR earnings driver will rest purely on the palm oil price supply and demand dynamics.
