Young age profile of trees. FR’s weighted average age of plantings of 8.3 years is relatively young. In addition, 54.5% of its trees are at peak production age of between eight to 17 years and 14.5% of its trees (out of total planted area of 97,501 ha) are moving into the prime category within the next three years. This implies there is substantial growth to be realised in coming years, with future FFB and CPO production growth supported with minimal increases in costs/capex.
Low cash cost of production. FR has managed to maintain a relatively low cash cost of production of US$200/tonne (for nucleus) for FY08 (in spite of a rising cost environment) as well as in 1Q09. Management has indicated that they would try to maintain this level of production cost for FY09. This low cash cost of production would put them in good stead to weather the harsh operating environment of potentially lower CPO prices in 2H09, tight credit conditions and a slow economic environment.
No significant near term refinancing issues. With the majority of FR’s debt being non current in nature (99.5% of borrowings/debt securities repayable, about IDR2.1t, are non current), there is no refinancing pressure in the short term. This allows management some time before repayment is due, to strengthen its balance sheet and to pay extra attention to financial liquidity and cost management issues.
Potentially lower CPO prices in 2H. We are maintaining our CPO price assumption of RM1,900/tonne for FY09 (current CPO prices are hovering around RM2,300/tonne). Using a P/E of 10x FY10F earnings, our fair value for FR is S$0.60. We are maintaining our NEUTRAL call on the stock in view of our bearish outlook for CPO prices.
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