4Q23 Results Preview: Supported By Strong Domestic CPO Pricing
We expect FR’s 4Q23 net profit to come in at US$50-55m (3Q23: US$51.1m, 4Q22: US$80.9m). This is mainly on the back of higher domestic CPO pricing, and FR sells more CPO domestically. There was also a higher inventory level in 3Q23 that would be reflected in 4Q23 due to timing issues. We also expect FR’s operating margin to improve in 4Q23 due to lower production costs, higher CPO ASP and higher sales volumes. Maintain BUY with a target price of S$1.65.
WHAT’S NEW
• 4Q23 results preview. First Resources (FR) will release its 4Q23 results on 29 Feb 24. We expect FR to report a net profit of US$50m-55m for 4Q23 (3Q23: US$51.1m, 4Q22: US$80.9m) on the back of higher operating margins brought about by lower production costs (due to lower fertiliser costs), higher CPO ASP and higher sales volumes. The potential slight qoq increase should be supported by:
a) Strong domestic CPO pricing, especially in Kalimantan. From our recent meetings with industry players, we understand that Indonesian domestic CPO pricing remained relatively stable at around Rp11,000/tonne in 4Q23 whereas Kalimantan has the highest pricing as there is huge demand from increasing refining capacity in the region. Note that 33% of FR’s estates are located in West and East Kalimantan.
b) Stronger CPO recently. FR sells more CPO domestically given the stable pricing of domestic Indonesia CPO as compared with exports. We also understand that FR has recently been selling more CPO than refined products, which is strategic given the challenging environment for downstream operations.
c) Carried-forward high inventory level from 3Q23. Notably, over 50% of the accumulated inventory in 3Q23 is in the form of CPO, and the margin for CPO sales is better than that of refined products. The majority of this build-up was due to timing differences in delivery. This situation is poised to positively impact profit margins for 4Q23.
• Partially offset by the challenging downstream operation (which contributes 10-15% to operating profit). We reckon that the downstream operation would continue to face challenges due to the competitive pricing environment in Indonesia with more refined products supply in the market. Hence, we expect the downstream utilisation rate for FR to be lower in the upcoming quarters.
