At What Price Would Benjamin Graham Buy First Resources?

First Resources Limited (SGX: EB5) is one of the fastest growing oil producers in Asia-Pacific. The company is involved in both the production of crude palm oil (CPO) and refining the CPO into value added products through its integrated processing facilities.

The company meets several of the caveats demanded by value investors.

A leverage ratio of 52% is not excessive for a growing company. The current ratio of 5, a measure of the current assets to current liabilities, also shows that the company is on top of its current debt obligations.

Last year was the first year that the long-term trend of growing revenue and income streams was blemished. Calming investors’ nerves surrounding this will be the fact that the cash flow from First Resources’ operations continued to rise, even though the top and bottom lines didn’t.

These measures go some way to insuring the financial soundness of the company. But what does the company’s price suggest about its value.

At S$1.80 a share First Resources has been edging towards its 52-week low of S$1.75 a share.

This implies an earnings yield of 7.7%. If we are to demand around twice the risk-free rate from the earnings yield of a potential value company then First Resources could rise to over S$3.47 before losing its value appeal.

Similarly, the company’s current dividend yield of 2.2% beats the risk-free return, even if it is only by a whisker. A share price rise of 10% to just over S$2 a share would be required before investors would earn a better return through US-10 year treasury bonds.

These first two measures have First Resources priced below what may be demanded from the likes of Benjamin Graham. The price-to-book ratio tells a different story, though. At present First Resources is priced at two and a half times its book value.

To fall below a ratio of one, the share price would have to fall fairly drastically to around 70 cents a share.

Those willing to forgo the margin of safety conferred by a price-to-book below one may already consider First Resources a value share. They may believe that First Resources in fact deserves to be priced at anywhere between S$2 a share to nearly S$3.50 a share.

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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 contributor Adam Kuo doesn’t own shares in any companies mentioned.