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Bet on bid for MP Evans

Following news that New Britain Palm Oil (NBPO) is to be acquired by Sime Darby at a massive premium to its share price, we've spotted another producer we think could be a prime target in an industry increasingly marked by consolidation: MP Evans (MPE).
October 23, 2014

There has been a flurry of bid activity in the palm oil sector of late. As land available for cultivation grows increasingly scarce, the big industry players seem to be on a shopping spree, snapping up their smaller peers to secure their long-term expansion strategies. Most recently, palm oil giant Sime Darby launched a knock-out bid for New Britain Palm Oil (NBPO), offering a near 85 per cent premium to the share price. Prior to this, in August, Felda Global Ventures, the world's third-largest palm oil plantation operator, offered $199m for Aim-traded Asian Plantations, which has now been declared unconditional. And this time last year, Felda plucked Pontian United Plantations. So, in a sector that is increasingly characterised by consolidation, the big question, therefore, is who might be next. We think it could be Aim-traded MP Evans (MPE).

IC TIP: Buy at 440p
Tip style
Speculative
Risk rating
Medium
Timescale
Long Term
Bull points
  • Acquisition target
  • Long-term value in palm oil
  • Valuation half that of recently acquired New Britain
  • Young plantations
Bear points
  • Weak palm oil price
  • Dry weather

 

 

This palm oil producer is small, but well-invested, and its plantations relatively immature: the age of MP Evans' palms averages eight years, making it one of the youngest in the industry. These factors should make it appealing to some of the bigger players. Moreover, much of the oil it produces comes with an 'ethical' label. In July, the group's palm-oil plantation and mill in Kalimantan, Indonesia, received official accreditation from the Roundtable on Sustainable Palm Oil. That means that crude palm oil produced by the mill from the fresh fruit bunches grown on the group's surrounding plantation can now be certified as sustainable. This is important because sustainably-derived palm oil is increasingly in demand from big multinationals, such as Unilever (ULVR).

MP EVANS (MPE)
ORD PRICE:440pMARKET VALUE:£243m
TOUCH:430-450p12-MONTH HIGH:500pLOW: 420p
FORWARD DIVIDEND YIELD:1.3%FORWARD PE RATIO:11
NET ASSET VALUE:658¢NET DEBT:2%

Year to 31 DecTurnover ($m)Adj pre-tax profit ($m)*Adj earnings per share (¢)*Dividend per share (¢)
201157.842.455.78.0
201283.224.731.08.0
201382.224.734.78.3
2014*97.538.553.58.8
2015*11849.065.59.5
% change+6+24+19-

Normal market size: 750

Matched bargain trading

Beta: -0.13

*Peel Hunt forecasts, adjusted PTP and EPS figures

£1=$1.61

Even if a bid did not transpire for MP Evans, palm oil's long-term story is a favourable one. Admittedly, the price of the stuff has recently nose-dived, but we see this as a short-term situation. Demand for palm oil will only grow as the global population increases and people in developing nations grow richer. The weather is another near-term headache for MP Evans. While the group enjoyed a strong first-half, an acute spell of dry weather will significantly hit volumes in the second half and into next year.

These short-term headwinds did not stop Sime Darby putting a per hectare price of $25,000 on New Britain, including its immature plantations - based on broker Peel Hunt's calculations. Compare that with MP Evans which is valued at just $10,000 a hectare and only slightly above net asset value. What's more, Evans has a strong balance sheet and its Australian beef cattle joint venture is up for sale at the right price.