By: Kleer

Closing date of application: 06 December 2007
Commencement of trading: 10 December 2007

Established in 1992, First Resources is one of the largest private sector producers of crude palm oil in Indonesia. All their operations and assets, consisting of 13 oil palm plantations and 6 palm oil mills, are located in Riau province, Sumatra, Indonesia.

As of July 2007, they own a total landbank of 184,280 ha.

Their business areas are depicted in the illustration below:

first-resources-business-areas.bmp

Key Competitive Strengths:

  1. A substantial majority of their trees are in the early stages of their peak production years, hence fruit bunch capacity is expected to increase over the next few years, at minimal increase in production costs or capital expenditure.
  2. They use the best industry practices so as to maximise their production yields and lower production costs.
  3. There is strong growing consumption for crude palm oil in China and India, which is expected to strongly increase demand.

Key Growth Plans:

first-resources-prospects.bmp

Key Risk Factors:

  1. Their entire revenue is derived from PRC and from repeat customers only.
  2. Their intellectual property (product innovation) is key to their business success but is difficult to protect – small economic moat.

Financial figures

Intended IPO price: $1.10
No. of shares available for public offer: 3m
No. of shares available for placement offer: 222m
Total post invitation share capital: Approx. 1,384.6m

Note: Unaudited 2QFY2007 figures were available in the prospectus.

FY2006
Revenue: $137.2m
Profit: $56.2m
NAV: 0.184
EPS: 0.026
EPS % Incr: 62%
PE ratio: 42.3x
Price: 1.10

2QFY2007
Revenue: $243.3m
Profit: $107.8m
NAV: 0.223 (incl. IPO proceeds)
EPS: 0.046
EPS Incr: 145% (Est.)
PE Ratio: 24x
Price 1.10

Dividend policy: No fixed policy.

Conclusion:

First Resources’ most comparable peers on SGX would be Wilmar, Golden Agri Resources, and Indofood Agri Resources. All three companies are much larger in size than First Resources in terms of market capitalization and also plantation sizes.

Naturally, they also deliver higher sales revenues. Here is a comparison in FY07 revenue between the 4 companies:

Wilmar – S$19.2 billion
Golden Agri Resources – S$2.3 billiion
Indofood Agri Resources – S$896.4 million
First Resources – S$243.3 million

However, First Resources does boast of a much higher profit margin than Wilmar and Indofood:

First Resources – 44.3%
Golden Agri Resources – 47.9%
Indofood Agri Resources – 16.6%
Wilmar – 3.5%

Considering all the factors, I believe First Resources should trade at a Fair Value of $0.83 or 18x PE only.

However, all palm oil stocks have currently recovered strongly since the August correction to new all-time highs, thanks to rising palm oil prices. As such, First Resources’ IPO comes at a very good time, and it should do very well in the next few months.

Unfortunately, with only 3m shares available on public offer, most value investors would not be able to buy this stock at a price level that offers good margin of safety. This stock will probably become a very good trading stock so long as this bull run continues.

Probability of getting allotted for the IPO – VERY LOW

I have only included the key points of the prospectus. Certain information have been omitted in order to keep my write-up short, but you can find the entire prospectus here.

Source: Extraordinary Profits