First Resources - DBS Research 2018-07-02: Appealing Organic Growth Prospects

First Resources - DBS Vickers 2018-07-02: Appealing Organic Growth Prospects FIRST RESOURCES LIMITED SGX: EB5

First Resources - Appealing Organic Growth Prospects

  • Entering prime age tree cycle.
  • Volume output to drive earnings besides CPO price.
  • Lower gearing is possible on strong cash inflow.
  • Maintain BUY and lower Target Price of S$2.00.

Entering prime age cycle.

  • Beyond the seasonal yield recovery in the second semester this year, First Resources's (FR) average tree age was only at 11 years, and is set to enter its prime age production phase in the next five years.
  • Going forward, we see First Resources as one of the best plays to capitalise on the tightening supply and demand outlook given its potential to grow its output to gain from steady long-term CPO prices.

Where we differ: We like FR’s organic growth prospects.

  • We believe First Resources' young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on upcoming maturing trees will improve First Resources' ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead.
  • First Resources' aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group’s strong volume and earnings growth in FY18F.

Potential catalyst: Consistent earnings delivery.

  • We believe consistent earnings delivery should move First Resources' stock price higher. Moreover, stabilising CPO price outlook will mean that First Resources' earnings growth will be driven by volume and CPO yield expansion.


  • We employed DCF methodology (FY18F as base year; WACC 11.8%; TG 3%) to arrive at a slightly lower fair value of S$2.00/ share after imputing our earnings forecast adjustments.

Key Risks to Our View:

  • CPO output may affect CPO price trend. Stronger-than- expected yields across Indonesia and Malaysia may pressurise CPO price trends next year.

A look at Company's listed history – what drives its share price?

First Resources’s share price performance vs CPO yield performance relative to sector. 

  • First Resources accurately demonstrates the yield performance sensitivity. The share price consistently outperformed its index (GGR, FR, BAL), averaging 14% p.a in 1Q08-4Q12.

Operating profit margin as a critical factor

  • First Resources' share price outperformance over 1Q08-4Q12 may be explained by its high operating profit margin (OPM) over the period. OPM is still relevant in explaining share price sensitivity.

CPO prices (in IDR) as a critical factor

  • Palm oil price is the key catalyst for plantation stocks; the share price movement trend generall tracks the palm oil spot price. However, the outperformance and underperformance of plantation stocks to CPO price are dictated by the productivity factor, where the stronger- or weaker-than-expected yields have led share price sensitivity to the palm oil price.
  • First Resources' share price correlation with CPO prices over the last 9 years is ~44%.

William Simadiputra DBS Vickers | Rui Wen LIM DBS Vickers | 2018-07-02
SGX Stock Analyst Report BUY Maintain BUY 2.00 Down 2.180