The present macro environment as still being conducive for high cude palm oil (CPO) price. High crude oil price around US$140/bbl, high soybean oil prices (around 65 US¢/lb) as well as forecasted growing global demand for palm oil should help support current CPO price at around RM3,400-RM3,500/tonne. USDA estimates global consumption of palm oil to be 40.18m tones for 2007/08, up from 37.17m tones the previous year.
First Resources (FR) is focused on the upstream portion of the industry's value chain and hence can capture the upside of current high CPO prices. This is as evidenced by FR's gross and EBITDA margins of approximately 73% and 70% respectively in 1Q08. EBITDA grew at a CAGR of 56.6% between '04 and '07 and was up 220.2% yoy in 1Q08.
Being relatively new to the oil palm plantation scene, FR has an attractive maturity profile of oil palms. Their weighted average age of plantings is 7 years in FY07, which is classified under the peak production age group. 61% of FR's planted area is in the "prime" category (7 to 18 years) and 11% is in the "young" category. As these "young" trees mature over the next few years, fresh fruit bunch (FFB) and CPO production will rise with minimal increases in costs or capital expenditure.
With the global trend of higher consumption and usage of palm oil and the present high CPO price of about RM3,500/tonne, FR will continue to enjoy the present conducive environment, with its young weighted average age of trees. DMG are reiterating their BUY call and fair value of $1.43 (13x FY08 PER).
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