6 Key Takeaways Investors Should Know from First Resources Ltd’s 2016 Annual Report
First Resources Ltd (SGX: EB5) released its 2016 annual report in late April.
As a quick background, the oil palm producer organises its business into two major segments: Plantations and Palm Oil Mills; and Refinery and Processing. There is much more that we can learn from First Resource’s annual report. I pulled out six key developments that investors might want to know.
For the first three takeaways, go here
4. Volatile commodity prices
From the first three takeaways, we have seen on how economic uncertainties, lacklustre demand and unfavourable weather can affect First Resources’ production levels and customer demand.
The push and pull forces has led to volatile commodity prices too:
“Against this backdrop, crude palm oil (“CPO”) prices (FOB Indonesia basis) were rather volatile throughout 2016, opening the year at humble levels of US$506 per tonne and closing the year at US$745 per tonne.”
“The average CPO price for 2016 came in at approximately US$667 per tonne, a decent recovery from approximately US$570 per tonne the year before.”
“In addition, upstream players were also pleasantly surprised by the impressive rally in palm kernel (“PK”) prices. Due to supply tightness of crude palm kernel oil and coconut oil, PK prices (local Indonesia basis) rallied from US$355 per tonne at the beginning of the year to US$647 per tonne at the end of the year.”
First Resources recorded US$575 million in revenue in 2016, a sharp increase from 2015’s $454 million in sales. So, despite the headwinds, it was the higher CPO and PK prices which lifted the company’s results in the end.
5. Planting new seeds of growth
First Resources has to (literally) plant new seeds of growth for its future:
“During the year, the Group added 1,116 hectares of oil palms in the form of new plantings. Meanwhile, we also grew our rubber assets via new plantings from 6,144 hectares to 6,312 hectares.”
“The budgeted capital expenditure for FY2017 is approximately US$80 million, which will be invested in new plantation development, albeit at a significantly slower planting pace, maintenance of immature plantation assets and continued expansion in our milling capacity.”
In 2014, First Resources had 194,567 hectares of oil palm plantation. This increased to 207,575 hectares in 2015. Noticeably, the pace slowed in 2016 where First Resources ended the year with 208,691 hectares of plantations.
6. Headwinds and tailwinds
First Resource’s business continues to be influenced by factors such as economic policy and competition from substitute oils:
“Looking ahead, palm oil prices will continue to be influenced by its relative pricing against other competing edible oils such as soy-bean oil as well as crude oil. Developments on macroeconomic policies, especially the United States’ biofuel policy, will continue to cause knee-jerk reactions to palm oil prices.”
Investors in First Resources have to be aware that it is in the commodity business. Demand can be affected by economic policies of countries like Indonesia and the United States as well as competing edible oils like soybean. Meanwhile, production levels can be affected by extreme weather conditions.
The business of commodities will have factors that the company will not be able to control.