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How First Resources Fuels Its Growth

First Resources (SGX: EB5) is a rather curious palm oil producer. Over the past few years, while some of its industry peers have struggled with growing their profits, First Resources has managed to achieve bottom-line growth without much sweat as the table below shows.

Profit Growth (year-on-year)
Year First Resources Golden Agri-Resources
(SGX: E5H)
Indofood Agri Resources
(SGX: 5JS)
2009 14% -56% 92%
2010 27% 134% -8%
2011 37% -11% 6%
2012 21% -68% -30%
2013 0% -24% -48%

Source: S&P Capital IQ

All three companies are major oil palm producers in Indonesia with Golden Agri-Resources, Indofood Agri Resources and First Resources having 471,000, 239,921, and 170,596 hectares of planted area in oil palm plantations respectively. On the surface then, it would appear that all three companies should be affected by wild swings in crude palm oil (CPO) prices.

For a glimpse of how CPO prices have varied over the years, Malaysian palm oil futures started 2009 at US$522 per metric ton; jumped 42% to US$742 in Jan 2010; continued climbing to US$1,239 one year later; fell by 18% to US$1,020 in Jan 2012 and; started and ended 2013 at US$777 and US$795 respectively.

Yet despite the wide variations in CPO prices which had affected profit growth at Golden Agri and Indofood Agri, First Resources has managed to buck the trend. How did it manage to do it? Turns out, a comparison of the growth of its plantation size and production history with its industry peers (using say, Golden Agri as an example) could help shed some light on the matter.

Plantation size growth (year-on-year)
Year First Resources Golden Agri-Resources
2008 10.3% 8.9%
2009 14.4% 9.1%
2010 10.9% 3.6%
2011 9.5% 3.0%
2012 10.7% 1.7%
2013 16.5% 1.7%

Source: Company’s earnings releases

Growth in production of crude palm oil and palm kernel
Year First Resources Golden Agri-Resources
2008 16.7% 5.4%
2009 13.5% 13.2%
2010 2.1% -3.2%
2011 20.2% 16.1%
2012 16.7% 10.3%
2013 11.6% -4.9%

Source: Company’s earnings releases

The two tables immediately above show how First Resources had managed to grow both its plantation size and output of crude palm oil and palm kernel oil at a much faster rate. For more detail on the figures, First Resources ended 2007 with 86,354 hectares and six years later at the end of 2013, its plantation size has almost doubled to 170,596 hectares. In comparison, Golden Agri-Resources’ plantation size had increased by ‘only’ 31% from 359,732 hectares to 471,100 hectares.

Even though there were other important factors – currency fluctuations, cost controls, and production efficiency, among others – it was also this much faster pace of brute growth in its plantation size and palm oil output that helped First Resources increase its profits even while its other industry peers faltered.

Foolish Bottom Line

First Resources’ steady profit growth had a huge role to play in its market-beating share price performance over the past five years; since 7 April 2009, First Resources’ shares have spiked by 588% from S$0.34 to S$2.34 while the Straits Times Index (SGX: ^STI) increased by only 77% from 1,802 points to its current level of 3,195 points.

It would be perfectly reasonable to expect the palm oil producer’s future profit growth to also have a big part in determining if it can continue to post a market-beating share price performance. And for First Resources’ profit growth, investors can have an important milepost to watch – the company’s ability to grow its plantation size and palm oil output.

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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.