EUR 850.00 For Business Accounts Only

Morningstar | First Resources’ 2018 Results Trail Expectations on Inventory Buildup; Shares Fairly Valued

First Resources has been profitable since its listing in 2007, thanks to the firm's low production costs, which benefited from the young plantation age profile, focus on production yields, and stringent cost management. While its total planted area is smaller than that of larger competitors such as Golden Agri-Resources, the company has a young plantation age profile with a weighted average age of about 10 years, as about 43% of its plantations are either immature or young (4-7 years of age). Oil palm trees have a productive life span of roughly 25 years and require about three years to mature. They are most productive between the ages of 7 and 18, and their yield gradually declines thereafter. This provides First Resources a solid foundation for strong future production growth.The firm has identified its niche as an efficient operator of high-quality plantation assets. Given that the majority of the firm's EBITDA (around 93.0% in 2017) comes from the more profitable upstream plantation and milling business, the company will remain focused on consolidating its position in this high-margin segment of the value chain, through either organic planting or strategic acquisitions. Nonetheless, the group also expanded into the lower-margin refining business, as the integrated business model allows it to capture additional value from the upstream plantation assets, as well as to better position itself to policy and levies changes that may affect the palm oil production value chain. Currently, refined palm products attract lower export taxes relative to crude palm oil, or CPO, in Indonesia.The weak CPO prices during the past few years had weighed on First Resources' earnings. However, CPO prices have been gradually recovering in 2016 due to declining palm oil output as a result of the El Nino dry weather conditions. As an upstream-focus plantation group, First Resources is a major beneficiary of stronger CPO prices. Although the negative effect of El Nino will eventually tapers off, we think CPO prices will be supported by the firm demand for edible oil, especially in Asia and Africa.