Can First Resources Be The Next Big Winner?

Legendary fund manager Peter Lynch wrote himself into the annals of finance when he was managing Fidelity’s Magellan fund from 1977 to 1990. During that time, he scored average annualised returns of 29% – every $1,000 invested into Magellan at the start of 1977 would have become $27,000 by 1990. With such a track record, […]


Legendary fund manager Peter Lynch wrote himself into the annals of finance when he was managing Fidelity’s Magellan fund from 1977 to 1990. During that time, he scored average annualised returns of 29% – every $1,000 invested into Magellan at the start of 1977 would have become $27,000 by 1990.

With such a track record, it can be very instructive for investors to dig into how exactly Lynch did it. And for curious investors, Lynch did write two books – One Up on Wall Street and Beating the Street – that detailed his investing methods and career. In particular, the first book contained checklists that he used while he did his investing research in the hunt for his next big winner.

So, what does Lynch’s checklist tell us about palm oil producer, First Resources (SGX: EB5)?

1) The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry?

First Resources, with a market capitalisation of some S$3.85 billion, has a share price of S$2.43. This translates into a trailing price earnings ratio of 12.8, which is a tad lower than the valuation for the Straits Times Index (SGX: ^STI).

First Resources is a palm oil producer with its plantations situated in Indonesia. In that context, it has other local companies like Golden Agri-Resources (SGX: E5H), Bumitama Agri (SGX: P8Z), and Indofood Agri Resources (SGX: 5JS) for company as industry-peers. This is how their valuations look like:

Company

Price

Trailing PE ratio

Golden Agri-Resources

S$0.59

19.3

Bumitama Agri

S$1.08

21.4

Indofood Agri Resources

S$0.91

22.9

Straits Times Index

3,082

13.4

Source: S&P Capital IQ; SPDR Straits Times Index ETF website

Based on the table above, we can see how First Resources has a PE ratio that’s lower compared to the market and similar companies.

2) What is the percentage of institutional ownership? The lower the better

According to S&P Capital IQ, institutions (comprising of big money managers) own around 18% of First Resources with the lion’s share – some 63% – belonging to Eight Capital Inc., an investment vehicle for the family of the company’s executive director and chief executive, Ciliandra Fangiono.

Looking at those ownership figures, it would seem that institutions own a small (but not insignificant) share of the pie.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

A quick check on Singapore Exchange’s website for company announcements revealed that both the company and insiders had not purchased any shares over the past six months.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

First Resources has been solidly profitable over the past seven years since 2006 and its earnings have also been growing steadily even though there was a slight contraction in profits in 2013.

Year

Earnings per share
(US cents)

Year-on-year change

2006

3.22

-

2007

4.30

33%

2008

6.75

57%

2009

7.74

15%

2010

9.84

27%

2011

13.4

36%

2012

15.3

14%

2013

15.0

-1.6%

Source: S&P Capital IQ

It should also be noted that First Resources’ profit growth is in stark contrast to other bigger palm oil producers like Golden Agri-Resources, which has seen its earnings swing wildly over the years.

5) Does the company have a strong balance sheet?

First Resources’ latest financials shows it having a cash-hoard of US$272 million on its balance sheet while having total borrowings of US$490 million. With more debt than cash on hand for the company, that’s not a sign of it having the strongest balance sheet.

6) Does the company have room to grow?

In First Resources’ latest earnings presentation, the company sees more headroom for growth down the line.

For instance, the company’s oil palm plantations currently have 170,596 hectares of planted area that it intends to grow to 200,000 within the next three years.  In addition, it also has plans to add two more crude palm oil (CPO) mills to its current count of 12 by 2015. That’s done to increase its current annual milling capacity of 4.05 million tonnes of fresh fruit bunches (FFB) in order to handle the increase in FFB production coming from its growing plantation size. Lastly, the company had just commissioned a new refinery on Dec 2013, which grew its annual processing capacity from 250,000 tonnes to 850,000 tonnes.

Demand for palm oil, according to fellow industry-peer Golden Agri-Resources, is set to grow over the years and the company even commented that “2014 will be more exciting for the industry” during its own earnings release.

With all the above as a backdrop, it does seem there’s yet more room to grow for First Resources.

Foolish Bottom Line

First Resources scores well on Peter Lynch’s checklist by having: 1) a low PE ratio; 2) low institutional ownership; 3) consistent earnings growth and; 4) space to grow.

So, can this company be the next big winner? Unfortunately, as useful as Lynch’s checklist is, there’s still important considerations we have to think about to reach a conclusion. How does the cash flow statement for the company look like? Does current management have a track record of solid execution and do they seem trustworthy? What are the potential threats to the oil palm industry and can the company navigate such issues well?

Those are just some of the other questions we have to think about – be it for First Resources, or any other company we might be interested in – before making any investing decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.