Shares in New Britain Palm Oil (NBPO) have taken a beating over the past year. Low crude palm oil prices, unusually wet weather and higher labour costs created a perfect storm, which hampered harvesting, dampened production and hacked away at prices, sending the share price tumbling 50 per cent. The heavy rain is still falling and palm oil prices remain depressed, so 2013's underlying profits may be even lower than 2012's. Yet there are signs that this could be just the time to buy the shares before production rises and the price of palm oil rebounds.
- Efficient, vertically integrated model
- Traceable palm oil becoming important
- Rising demand from developing economies
- Strong valuation argument
- Shares mirror palm oil price
- Bad weather always a risk
There are several reasons to like New Britain. It's one of the world's largest, vertically-integrated palm oil producers with fast-growing production. Output doubled between 2007 and 2011 and the group has more than 78,000 hectares of palm estates. Its high-tech facilities also mean its extraction rate of oil is higher than the Malaysian average.
Because its plantations produce fully traceable oil, New Britain can sell most of its output to big consumer goods producers, who fear falling foul of environmental campaigners. Unilever, for example, one of the world's largest users of palm oil, has set a target to use only traceable palm oil by 2020.
There's also the demographic factor. Demand for edible oil is rising as populations grow and developing countries become richer. India, for example, meets more than 50 per cent of its demand for cooking oil through imports of mostly palm from Indonesia and Malaysia. Malaysia's export to India has doubled in the past five years, while India's imports of palm oil could rise more than 17 per cent in the year to October 2013, according to Reuters. Meanwhile, the US Department of Agriculture forecasts global palm oil consumption to grow 7 per cent next year.
True, last year's profits were also hit because the Papua New Guinean kina, in which New Britain pays most of its costs, such as labour, rose against the US dollar, in which the company reports its figures. But the exchange rate is now pulling back. Shipping costs have also been cut by 9 per cent and administration costs have fallen by 15 per cent. Management targets £30m of further savings in 2013.
| NEW BRITAIN PALM OIL (NBPO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 415p | MARKET VALUE: | £623m | |
| TOUCH: | 400-415p | 12-MONTH HIGH: | 860p | LOW: 352p |
| DIVIDEND YIELD: | 2.4% | PE RATIO: | 19 | |
| NET ASSET VALUE: | 434p | NET DEBT: | 31% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 324 | 200.1 | 95.3 | 28 |
| 2010 | 461 | 376.5 | 170.7 | nil |
| 2011 | 780 | 59.4 | 52.8 | 31 |
| 2012 | 677 | 4.4 | 0.4 | 15. |
| 2013* | 611 | 72.5 | 33.2 | 15 |
| % change | -10 | – | – | nil |
Normal market size: 3,000 Market makers: 8 Beta: 0.6 *Panmure Gordon Forecasts £1=$ 1.51 | ||||
Another concern is that New Britain's share price is closely correlated to the palm oil price, which has fallen 35 per cent over the past year to $756 per metric ton. But the price may have bottomed out. Reserves in Malaysia, the world's second-largest producer, fell 11 per cent between March and April to 1.93m tonnes, according to the Malaysian Palm Oil Board. Stockpiles in Indonesia may also drop this year as demand outstrips supply and the low price makes palm oil competitive.
In addition, barriers to entry remain high chiefly because the amount of land available for cultivation is diminishing. All of this is good news for New Britain that, arguably, is not reflected in its share price.
Yet there is also a compelling valuation argument in favour of its shares. First, the shares trade below net asset value of 434p. More subtly, based on New Britain's 'enterprise value' - stock market value plus its net debt - its plantations are valued at $15,900 per hectare. That's 35 per cent below the pro-rata value of a group of quoted Malaysian palm oil producers, says broker Panmure Gordon. The broker also reckons that if New Britain's plantations got the same valuation as the other companies its share price would be 710p.
