Share Price S$2.24
Target Price S$2.60
First Resources (FR) is an Indonesia-based plantation company with a total planted area of 165,876ha in Indonesia and refining capacity of 250,000 tonnes p.a. It operates 12 palm oil mills in Indonesia and most of its plantation estates are strategically located in Riau and West Kalimantan. Eight Capital is the largest shareholder with a 63.2% stake.
• Balanced age profile propels growth. FR has a balanced age profile with about 58% being immature and young areas and a weighted average age of 8 years. This would ensure sustainable fresh fruit bunch (FFB) production and earnings growth in the next 5 years as its oil palm trees reach maturity and enter prime age. Although we expect to see weaker production growth of 3% in 2013 due to the biological cycle and dry weather, FFB production is expected to recover in 2014 at a double-digit rate given the balanced age profile.
• Flexible production strategy to ensure healthy margin. FR has the advantage of switching its downstream business between biodiesel production and palm olein and stearin production to ride on strong biodiesel or palm olein demand, depending on which offers higher margins. As the refining margin in Indonesia has shrunk significantly due to rising competition from new capacity, FR has switched to biodiesel production as it still offers healthy margins. This would help preserve good margins for its downstream business.
• Huge land reserves for future development. FR has about 162,000ha of unplanted landbank for future replanting. FR targets to plant 12,000-15,000ha of new area and increase its planted area to about 200,000ha from 138,587ha currently. Assuming a new planting rate of 15,000ha pa, it could continue to plant for another 10 years.
• Maintain BUY with target price of S$2.60, based on 15x 2014F PE at midcycle valuation. FR remains our favourite as its balanced age profile will support earnings growth and it has a hands-on management team. We estimate EPS at 11.3 US cents, 11.9 US cents and 12.9 US cents for 2013-15 respectively.
Publish date: 28/11/13