First Resources FY2009 Analysis

First Resources FY2009 Highlights
* First Resources Increased PATMI to Rp1,169 Billion (US$112.5 Million) for FY2009; Ups Dividend Payment by 56%

* Record production volumes, tight cost control and lower export taxes buffer 18% lower revenue

* Well-placed to fund capex needs and dividend payments from robust operational cashflows and strengthened balance sheet

* Consistent planting strategy augments the Group’s position as a leading producer, enabling it to ride upturn in CPO prices

Analysis of Income Statement

For FY 2009, First Resources experienced an 18% drop in revenues from the crude palm oil division, and a 23% drop in revenues from the palm kernel division. The drop in revenue was due to lower prices of Crude Palm Oil and Palm Kernel for the year. Cost of Sales remained constant from FY2008 to FY2009, even though volume produced had increased.

Selling and Distribution Costs were greatly reduced by 83% as a result of the decrease in export taxes levied by Indonesia during this period. However, G&A expenses increased due to higher bonus and higher salary paid out to their staff. The lower gross profit for the year translated to a 26% decrease in Profit from Operations less Fair Value Changes.

The gains on forex and cross currency swap resulted in a profit for the year increasing 7% YOY. Eliminating the forex, swaps and fair value effects, profit for the year dropped 55% YOY, and was 21% of sales, compared to 39% of sales the year before.

Another thing to note is that finance expenses increased to 10% of sales, from 5% the year before. The increase is due to the convertible bonds issued and a smaller percentage capitalized from the year before.

P/E ratio for the year was at 8x.

Analysis of B/S

The Balance Sheet strengthened over the past year. Assets increased by 22% YOY, with Liabilities increasing by 13%. The increase in assets was attributable to a RP1trillion (SGD151 million) increase in biological assets. One thing to note is that the interest bearing loans increased by RP98billion (SGD14.8million).

Current Ratio increased from 2.75 in 2008 to 3.62 in 2009, and leverage dropped to 0.70. Net Asset Value was at SGD0.56. ROE dropped from 27% to 22% due to a lower asset turnover ratio.

First Resources Land Bank

First Resources grew its total planted area to 108,917 hectares, adding 13,000 hectares over the past year. Its planted area is approximately 50% of its total land bank.

Comparison with Other Companies

As Golden Agri turned in a lower than expected profit for the last quarter, the 2 companies that will be compared to First Resources are Wilmar and Indofood Agri.

One thing I would like to point out is that First Resources revenue performance this year was below analyst expectations, which could translate to the lower P/E ratio as compared to Wilmar and Indofood Agri.

One thing to note about Indofood Agri is that the high performance relative to Wilmar and First Resources is due to Fair Value revaluation, and more importantly, the forex changes are locked in under operating profit.

Looking at the figures above, I believe that First Resources is undervalued to its peers, with the industry trading at approximately 15x P/E. The adjusted P/E ratios when FV is taken out of he equation, assuming that the FV changes are shared among Equity Holders and Minority Interests, put Wilmar at 16x P/E, Indoagri at 21x P/E and First Resources at 13x P/E. Like it was mentioned earlier, one thing to take note of is the finance expense.

With about 50% of its planted area still immature, First Resources is poised to continuing growing and is the growth company to look into for Palm Oil.

Valuation Problems

Since the drop of First Resources the past few days, and with DBS Vickers coming up with a 12 mth TP of 1.16 and OCBC Research coming up with a technical TP of 1.08 based on resistance turned support, some have asked me if I made any mistake in my valuation etc.

To start of, I will admit that a mistake that I have made is to average up the 2nd time by purchasing more at 1.19. However, I still value First Resources with a 6 mth target price of 1.30 to 1.40, and a 12 mth target of 1.50.

DBS Vickers has stated that there could be negative earnings surprise as earlier upgrades were based on CPO price assumptions, and downgraded First Resoures to Hold due to limited upside.

As compared to other investors, I will reiterate that I am very bullish on CPO, and with the economy recovering, the prices of CPO will increase. Besides being bullish on CPO, I believe that First Resources is still undervalued to its peers, with its peers trading at approximately 15x to 16x P/E Ratio. First Resources, based on projected earnings (FY09 Results are slated to be out in March), would currently be trading at approximately 1.30. My 12 mth target is made with assumptions in an increase of CPO prices.

Furthermore, the positive issue about First Resources is that it prefers organic growth over acquisitions, although the management has not ruled out on acquisitions. Organic growth is important because it prevents the company from overpaying for growth. Similar mistakes have been made by companies in other industries, and I believe that the management is setting First Resources on the right path.

The DBS report can be found here. The writeup on Thakral will be posted later today. I will be heading down to the Budget Terminal since I am in the vicinity to check out Tiger Airways.

First Resources

Bought more lots of First Resources at closing. Price 1.19. Average Price 1.04

First Resources

Just an update. I averaged up on First Resources @0.985, bringing my cost up to 0.97.

I believe that nothing has changed fundamentally with the company, and that First Resources is still undervalued. I am not accurate with TP, but I foresee a 12 month TP of 1.50 based on its performance over the past year and its projected TP as compared with the industry.

First Resources

Why Palm Oil?

Palm Oil is a renewable resource, and is important component in many industries, such as food and biofuel. Furthermore, the yield from a palm plantation is much higher than that of other organic oils, such as sunflower, rapeseed and soybean, and demand of Palm Oil has increased worldwide as compared to other natural oils.
With alternative energy the focus in recent years, and most likely years ahead, the oleochemical industry is set to provide a renewable (although not pollution free) resource, and wean the world off dependence of petrochemicals.

About First Resources

First Resources Limited is one of the leading oil palm plantation companies in Indonesia. We are an upstream operator with primary business activities in the cultivation and harvesting of oil palms, and the processing of fresh fruit bunches into crude palm oil for local and export sales. Established in 1992, we are one of the fastest-growing plantation companies in the region. Today, we manage more than 100,000 hectares of planted oil palm plantations and operate 8 palm oil mills in Indonesia. Our plantations produced approximately 1.4 million tons of fresh fruits bunches and 323,000 tons of crude palm oil in 2008.

Why First Resources
I decided to look into the following companies for comparison: Indofood Agri, Golden Agri, Kecana Agri, First Resources and the company with the biggest market cap, Wilmar. Going by market cap, First Resources ranked 4th among these 5 companies.

For the year ended 2008, the profit margin for Golden Agri came up tops with 48%, while First Resources profit margin was 41% and Wilmar was 5%. Delving into the Operating Profit Margin, Golden Agri had a margin of 67% with First Resources having 75%, Wilmar having 7%. Total Profit for the Year is as follows (based on today's exchange rate):

Indofood Agri - 1,066,727 Rp Million - 157 million SGD
Golden Agri - 1,418,645 USD '000 - 1977 million SGD
Kencana Agri - 10,324 USD '000 - 14 million SGD
First Resources - 1,151,597 RP Million - 170 million SGD
Wilmar - 1,556,431 USD '000 - 2169 million SGD

P/E Ratio for 2008 showed that GAR was trading at a P/E of 1, with First Resources at a P/E of 3. All companies were not highly leveraged, all with a gearing ratio of less than 1.

The noteworthy point however, is that in 2008, due to an increase in value of CPO and kernels, resulted in all companies posting an increased profit. This fair value gain however, is not a realised gain, and as valuations change, so will the income statement. Taking that factor out, First Resources had an operating profit margin of 61%, and a YOY of 105%. Wilmar had a YOY operating profit of 138%. Golden Agri posted a drop of 10% YOY when the factor was removed.

Looking at the most recent earnings release (3Q 09), at this point I narrowed down to First Resources, GAR and Wilmar, First Resources posted a drop of 34.7% in Gross Profit over the YTD, Wilmar with a drop of 33.1%, while Golden Agri posted a change of -55%. EPS for YTD of FR was 436Rp, Wilmar was 18.12USD cents and GAR was 1.18USD cents. Extrapolating it to a full year, FR would have an EPS of approximately 580Rp, Wilmar to be at 30USD cents and GAR with 1.6USD cents, giving the following P/E ratio:

GAR - 21
Wilmar - 15
FR - 11

Furthermore, upon looking further into the Q3 report, First Resources had an increase in 10.3% volume of CPO and 1.7% of Palm Kernel, while Wilmar had a decrease in 5.4% of Palm Oil, while seeds increased by 19.4%. Values were not available for Golden Agri.

The only 2 challenges that I foresee is the price of palm oil being a hindrance, and that First Resources has a much lower market capitalization than its competitors. For the first, as the demand for palm oil will increase and play a greater part for the next decade, the price of palm oil will increase, and as for the latter, it would depend greatly on the management.

*Disclaimer I am vested