Would Peter Lynch Buy First Resources?

FirstResourcesIf you are looking for a business that you can describe with a crayon, then First Resources (SGX: EB5) would probably be it. The sheer simplicity of the business is something that could whet the appetite of Peter Lynch.

Lynch once said: “Go for a business that any idiot can run – because sooner or later, any idiot is going to run it.

First Resources grows palm trees, around 146,000 hectares of the green stuff to be precise. It process the fresh fruit bunches (FFB) into crude palm oil (CPO) and palm kernel (PK) at one of the 12 mills that it owns. It has its own refinery plant and its own biodiesel plant too.

Lynch advocates that investors should avoid hot stocks in hot industries. Palm oil producers could not be any further from a hot industry right now. Palm oil prices are currently under pressure as global economies slowly climb out a prolonged downturn.

Many palm oil producers are feeling the heat of the downturn too. But First Resources appears to be weathering it well. Since 2009, sales have more than doubled, and profits have followed suit. Additionally, the company is only valued at 12 times historic earnings.

What is also interesting is that earnings at First Resources is growing – and growing quite quickly. In 2008, Net Income was S$142m. Last year it was S$300m, which would imply a growth rate of around 16% a year. In other words, the PEG ratio or PE to Earnings Growth is 0.75, which would be below Lynch’s criterion of one.

A healthy balance sheet, with relatively low levels of debt compared to shareholder funds, is something else that Lynch would like to see. First Resources has debt, but it is relatively modest compared to shareholder equity. Its Leverage Ratio is comparable to Golden Agri-Resources (SGX: E5H) and lower than Wilmar International (SGX: F34).

Cash, which is always a useful buffer for any business, is adequate at First Resources. With more than S$300m in readies, it has enough cash on hand to meet its short-term liabilities.

The company has also gradually ratcheted up its payout. In 2008 it was $0.01 per share; in 2009 it was S$0.02 cents per share; in 2011 it was S$0.03 cents per share and last year it was S$0.04 cents per share. But despite the hike in distribution, First Resources’ payout ratio is only 20%, which could suggest that it has plenty in the tank.

First Resources seems to tick all the boxes. If we were to look for a downside, it would be the industry itself. Palm oil producers are not exactly flavour of the month. They don’t have a great reputation with both environmentalist and nutritionists. But that might be just the reason why they could be a red rag to a commodity bull.

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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 Director David Kuo doesn’t own shares in any companies mentioned.