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Bargain Shares: An undervalued soft commodity play

An Indonesian and Malaysian producer of crude palm oil has more than trebled first half pre-tax profits on the back of a 73 per cent year-on-year increase in the CPO price. Prospects look bright for the second half, too.
Bargain Shares: An undervalued soft commodity play
  • Interim pre-tax profit more than trebles to $54.2m (excluding $3.95m biological asset movement credit).
  • Fresh Fruit Bunches production up 15 per cent to 586,500 tonnes.
  • Bought in crops increase 37 per cent to 583,400 tonnes.
  • Crude Palm Oil (CPO) price averages $1,122 per metric tonne (mt) in first half, up from $648 per mt in the first half of 2020.

Anglo-Eastern Plantations (AEP:650p), a producer of crude palm oil (CPO) and rubber from 16 plantations spread across 74,131 hectares in Indonesia and Malaysia, has delivered first half pre-tax profits that exceed the whole of last year.

Buoyed by a 73 per cent year-on-year increase in the CPO price (ex-Rotterdam), 15 per cent higher production due to better weather conditions, and increased mature acreage, group revenue of $201m was almost two-thirds higher in the six-month period. Anglo’s ex-mill CPO prices increased by 28 per cent to average $701 per tonne, the discount to ex-Rotterdam prices reflects logistic costs that buyers are required to pay, Indonesian CPO tax and levy. Anglo also benefited from hot rubber prices, which were almost 50 per cent higher year-on-year.

Admittedly, the rally in the CPO price from $1,014 per mt at the start of 2021 to a high of $1,340 per mt in May was partly based on speculation of unfavourable weather conditions in prime soybean-producing countries and the adverse impact this would have on the supply of soybean oil. This resulted in a positive spill-over effect in demand for CPO which is the closest substitute for soybean oil. However, with the spot price holding around $1,240 per mt, clearly other supportive factors are at play.

For instance, India, the world's largest edible oil importer has cut its taxes on CPO and other palm oil products until the end of September while maintaining the existing tax rates on other vegetable oils. The move is intended to tame domestic inflation and should lead to increased imports and greater demand for CPO at the expense of other vegetable oils.

In addition, the Indonesian Government reduced CPO export levy at the start of July, cutting the maximum amount payable to $175 per mt when CPO prices exceed $1,000 per mt, effectively a $80 per mt tax reduction. Non-food applications of CPO include use in bio-diesel and oleochemicals, so the lower tax regime makes the commodity relatively more attractive for use in fuel especially given the 40 per cent spike in crude petroleum prices this year.

Simon Thompson's 2020 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 07.02.20 Bid price 26.08.21 DividendsPercentage change (%)
Metal Tiger (see note two)MTR11.8p26p0.0p120.3%
Cenkos SecuritiesCNKS56p78p4.5p47.3%
Anglo Eastern PlantationsAEP570p632p1.1p11.1%
Chenavari Capital Solutions (see note one)CCSL61.4p35p0.0p3.4%
Brand ArchitektsBAR160p155p0.0p-3.1%
CIP Merchant CapitalCIP57p54p0.0p-5.3%
PCF (suspended)PCF33.3p23p0.4p-29.7%
Average     71.3%
FTSE All-Share Total Return index7,7968,101 3.9%
FTSE AIM All-Share Total Return index1,0991,478 34.5%

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange

True, there is a risk of production disruption if the Covid-19 pandemic interrupts operations, but Anglo looks well positioned to deal with it given that plantations are in remote locations, away from main cities, so have lower population densities and infection rates.

I included Anglo’s shares at, 570p, in my market beating 2020 Bargain Shares Portfolio and feel a return to the 2017 price high (886p) is a realistic target. Rated on a 37 per cent discount to book value of $558m (1,029p a share) which includes net cash of US$159m (293p a share), and on a trailing 12-month cash adjusted price/earnings (PE) ratio of 3.3, the shares rate a buy.


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