Would First Resources Pass The Warren Buffett Test?

Warren Buffett knows a thing or two about investing. There are some types of companies that he likes, and he would even pay a premium to own. Then there are some businesses that he would not touch at any price.

First Resources (SGX: EB5) cultivates palm trees. It also refines and processes Fresh Fruit Bunches (FFB), which means that it is vertically integrated.

One of the disadvantages of being in the commodities business, such as the palm-oil industry, is that First Resources has little or no control over the price of its produce. Consequently, its earnings could be volatile.

Over the last 12 years, First Resources has delivered a median bottom-line profit of S$155 million, with a standard deviation of S$105 million. That would imply some degree of volatility, which Buffett is likely to take a dim view to.

But First Resources runs a high-margin business. Its Net Income Margin has been around 33%, which is quite high. It means that First Resources makes around S$33 of bottom-line profit on every S$100 of top-line revenue.

Buffett also likes businesses that are efficient. On that score, First Resources is only quite efficient. It generated around S$33 of revenue on every S$100 of asset employed in the business. The average Asset Turnover for the Singapore market is a little higher at around 0.5.

First Resources had Total Asset of S$1.9 billion and Total Liabilities of S$881 million, of which around half was long-term debt. Buffett dislikes heavily leveraged companies because that could introduce unwanted volatility. First Resources’ Leverage Ratio is not excessive at about 1.8.

On balance, First Resources has many redeeming qualities. But its Price-to-Book valuation of 2.8 could be the clincher, if push comes to shove.

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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.