Maybank Securities analyst Ong Chee Ting has downgraded First Resources to “hold” from “buy” after he sees limited upside to his unchanged target price of $1.69.
Shares in the company surged after it announced its FY2024 results on Feb 28, to close at $1.66 on March 18. For the FY2024 ended Dec 31, 2024, First Resources’ earnings surged by 69.1% y-o-y to US$245.8 million ($327.8 million) due to record production and higher crude palm oil (CPO) prices.
On March 18, First Resources also announced that it was acquiring 3.06 billion shares representing a 91.17% stake in PT Austindo Nusantara Jaya for US$329.8 million. A conditional shares purchase agreement was entered between First Resources’ majority-owned subsidiary, PT Ciliandra Perkasa and PT Austindo Kencana Jaya, PT Memimpin Dengan Nurani, Sjakon George Tahija and George Santosa Tahija on the same day.
Upon the completion of the deal, First Resources is obliged to conduct a mandatory tender offer for the rest of PT Austindo Nusantara Jaya’s shares. The deal is expected to be completed by May and a 100% take-up offer will cost First Resources a total of US$361.7 million, Ong notes.
In his report dated March 19, the analyst sees the acquisition as a long-term plus for the group even though it is expected to lead to earnings per share (EPS) dilution.
“By our estimate, the proposed acquisition is valued at EV/ planted hectare of US$10,202, a decent price considering the scarcity of land,” Ong writes.
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“At 37.5 times FY2024 [First Resources’] P/E ratio, it is short-term EPS dilutive for First Resources, but PT Austindo Nusantara Jaya’s depressed EPS was partly due to losses at its non-core food crops. We are long-term positive on PT Austindo Nusantara Jaya’s potential and feedstock security it offers to First Resources’ downstream operations,” he adds.
On a pro forma basis, First Resources’ net tangible assets (NTA) and EPS would have been diluted by 1% and 8% respectively assuming the group bought 100% of PT Austindo Nusantara Jaya’s shares on Jan 1, 2024.
That said, Ong believes that the EPS dilution will be much smaller in the coming years should First Resources improves the profitability of its oil palm segment.
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“Our back-of-the-envelope calculation suggests that the acquisition (funded by borrowings) will increase First Resources’ pro forma net gearing from 8% (for FY2024) to 32%, a still manageable level,” says the analyst.
Furthermore, for First Resources, the acquisition was an opportunity for the group to expand its upstream footprint by 27% or 48,353 hectares of nucleus area on top of its existing 178,854-hectare nucleus planted area in FY2024. The group will also be able to increase its CPO output by 25% to 1.25 million tonnes and enhancing its feedstock availability for its 1.35 million tonne expanded refining and processing capacity by the end of 2025.
Based on channel checks, PT Austindo Nusantara Jaya’s stake was last listed for sale in the middle of 2024 where several parties bid for the stakes. In Ong’s view, PT Austindo Nusantara Jaya’s main attraction lies with its 100% RSPO certified palm oil and fifth ranking on SPOTT. RSPO stands for Roundtable on Sustainable Palm Oil while SPOTT is a platform that assesses commodity producers, processors and traders on their public disclosure “regarding their organisation, policies, and practices related to environmental, social and governance (ESG) issues”.
In addition to his unchanged target price, Ong has kept his earnings estimates unchanged. Ong’s target price is based on 9 times First Resources’ FY2025 P/E ratio or -0.75 standard deviations (s.d.) of its six-year mean.
Shares in First Resources closed 2 cents lower or 1.21% down at $1.64 on March 19.
