First Resources - DBS Research 2018-10-10: Ample Growth Trajectory


First Resources - Ample Growth Trajectory

  • Positive earnings growth of 13% y-o-y in 2019.
  • Yield to keep cost low.
  • Earnings revision on new FX and CPO price assumption.
  • Maintain BUY with new Target Price of S$1.97.

Aiming for positive earnings growth in FY19.

  • We remain positive on First Resources (FR)’s earnings performance on decent output and yield prospects. 
  • We expect earnings to grow by 13% y-o-y to US$149m on the back of flat ASP and volume expansion.  Yield performance will also help to keep First Resources’ cost per hectare low.

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 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 FY19F.

Potential catalyst: Consistent earnings delivery.

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

~ ~ Where SG investors share


  • We employed DCF methodology (FY19F as base year; WACC 11.8%; TG 3%) to arrive at a slightly lower fair value of S$1.97/ share after imputing our earnings forecast adjustments.

Balance Sheet:

Balance sheet deleveraging potential.

  • On our estimates, First Resources’ debt cost is a paltry 3.9% p.a.
  • The low cost comes primarily from Sukuk issuances between 2012 and 2014 – which were subsequently swapped into USD. While the group had indicated its intention to refinance maturing Sukuk this year, we are maintaining our debt profile forecast for now. The group’s net debt-to-total equity ratio is projected to be 10% at end- December 2018 vs. 20% at end-December 2017.

Strong free cash flow generation.

  • We expect the group to spend US$2.2m in FY18 (c.2,000 ha on new planting and 15,000 ha immature). This would translate into free cash flow generation of US$202m in FY18F and US$230m in FY19F – translating into free cash flow yield of ~9% relative to its intrinsic value.

Share Price Drivers:

Trading at a discount.

  • The stock is currently trading close to - 1SD from its average historical PE. We believe consistent earnings delivery in FY18 should move the stock price higher.

Key Risks:

Volatility in CPO prices and USD exchange rates.

  • Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general.

Setback in expansion plans.

  • Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth.

Regulatory changes.

  • Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils.

Market sentiment.

  • Changes in fund flows towards or out of emerging markets would affect valuations for plantation counters.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | 2018-10-10
SGX Stock Analyst Report BUY MAINTAIN BUY 1.97 DOWN 2.000