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Until recently, the choice for investors seeking exposure to palm oil producers has been fairly limited, but with soaring prices on futures contracts whetting investors' appetites for the sector, the investment opportunities are growing.
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Last December, New Britain Palm Oil listed in London at 250p. The shares soared above the 600p level this month. And last week, Equatorial Palm Oil, a palm oil producer with plantations in Liberia, announced its intention to float on the Alternative Investment Market, hoping to raise £15m in the process.
This IPO will be a good test of the City's hunger for the sector. Lately, the share prices of the established palm oil producers such as MP Evans, REA Holdings and Anglo-Eastern Plantations - have tailed off from their peak after the Indonesian government introduced a complex tax system to cap exports.
Increases in futures prices now trigger a rise in the levy on products shipped out of Indonesia. The effective tax rate is 10 per cent when futures prices are below $1,100 a tonne, 15 per cent up to $1,200 and 20 per cent up to $1,300, affecting the potential upside to earnings. Yet the biggest source of concern for investors comes from the fact that the Indonesian government might change the rule again to limit social unrest.
By contrast, New Britain Palm Oil - which operates in Papua New Guinea - has continued to power ahead, suggesting that investors are on the lookout for alternatives to Indonesian producers. It is planning to expand its plantations with a proposed acquisition in Papua announced this month.
Equatorial Palm Oil is certainly worth keeping an eye on. Production yields are lower in West Africa than Indonesia, but this should be offset by a lower cost base. Otherwise investors may be put off by the recent history of political unrest in Liberia, although this risk should be reflected in its float price. Despite the new tax regime in Indonesia, the buoyant palm oil price means that MP Evans, REA and Anglo-Eastern remain good value on a long-term basis. New Britain looks fairly fully valued after its meteoric rise, but is more fully geared to the palm oil price, so may still attract speculative interest.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
