Top Story : First Resources – Exponential earnings growth at inexpensive valuations - Outperform
New Coverage
♦ First Resources (FR) is a small (by Indonesian standards) but efficient pure plantation company listed in Singapore. FR has 113,010ha of landbank in Indonesia and currently operates 8 palm oil mills. It has also ventured downstream via a 250k tonne capacity refinery and a 250k tonne capacity biodiesel plant. It is currently constructing a 300k tonne fractionation plant which will be completed by 1HFY12/011.
♦ We believe there are five major reasons for investing in FR:
1) Its strong growth profile, given its young plantation age profile;
2) Aggressive planting targets, given its unplanted landbank;
3) Efficient planter, with below average cost of production;
4) Downstream expansion to boost bottomline; and
5) Valuations at unjustifiable significant discount to peers.
We project FR to post a core net earnings (ex-EI and biological gains/losses) CAGR of 59.8% over the next three years to FY12.
♦ FR is currently trading at 8.7x CY10 EPS and 7.2x CY11 EPS, which is a significant discount to the Malaysian plantation sector’s average PE of 19.2x for FY10 and 15.4x for FY11 and even to the regional plantation sector average of 12.6x for FY10 and 10.6x for FY11. Given FR’s efficiently-run estates, clean operating structure and sustainable earnings growth for the medium to long term, we believe FR does not deserve to trade at such a large discount to industry peers. We assign a target PE of 11.5x to FR’s FY11 EPS, which is a 30% discount to our Malaysian target PER for the mid-cap plantation stocks, to obtain our target price of S$1.55/share. We initiate coverage with an Outperform recommendation.
RHB Equity 360° (First Resources, QL, IJM, EON Cap, PLUS, WCT, Furniweb; Technical: Hai-O, CIMB) - 24/05/2010
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