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Bargain shares: Fuelled for a rally to record highs

A producer of crude palm oil and rubber is benefiting from surging prices, higher production and lower Indonesian export levies
Bargain shares: Fuelled for a rally to record highs
  • Average crude palm oil (CPO) price up 74 per cent to US$1,156 per metric tonne (mt) in the first nine months of 2021.
  • CPO price has surged 8 per cent since 30 September 2021.
  • Net cash more than doubles to US$192m (355p a share).

Anglo-Eastern Plantations (AEP:748p), a producer of crude palm oil (CPO) and rubber from 16 plantations spread across 74,131 hectares in Indonesia and Malaysia, has delivered a robust third-quarter trading update that fully supports the ongoing re-rating.

In the first nine months of this year, Anglo’s own production of fresh fruit bunches increased 13 per cent to 915,690 metric tonnes (mt), a reflection of better weather conditions and increased mature area. The group also benefited from higher bought in crops, up more than a third to 878,590 mt, the effect of which has been to drive up CPO production by 23 per cent to 364,040 mt.

Furthermore, the stellar rise in the CPO price (ex-Rotterdam) I highlighted in my last update (‘Bargain shares: An undervalued soft commodity play’, 26 August 2021) has continued, so much so that the price has surged 8 per cent since the end of Anglo’s third quarter and is up 35 per cent to US$1,420 per mt since the start of the year. Anglo’s ex-mill CPO prices increased by 36 per cent to average $731 per tonne in the first nine months of 2021, the discount to ex-Rotterdam prices reflects logistic costs that buyers are required to pay, Indonesian CPO tax and levy.

Simon Thompson's Bargain Shares Portfolios Performance (2016-2021)
 Portfolio total return to dateFTSE All-Share total return to dateFTSE Aim All-Share total return to date
2016100.8%58.9%90.3%
2017139.0%27.0%45.4%
2018100.0%16.2%20.0%
201981.4%20.2%38.9%
202055.5%5.6%29.3%
202120.3%15.4%2.7%

Source: London Stock Exchange, FTSE International, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Latest prices at 4.30pm on 1 November 2021.

 

The latest rise in CPO prices supports a bumper fourth quarter as does the ongoing demand for the commodity as the Covid pandemic eases. For example, non-food applications of CPO include use in bio-diesel and oleochemicals. The combination of a lower tax regime – the Indonesian government cut the CPO export levy in early July, reducing the maximum amount payable to $175 per mt when CPO prices exceed $1,000 per mt – and the 74 per cent surge in crude petroleum prices this year is making CPO far more attractive for use in fuel.

Anglo lacks analyst coverage, but even if the group only matches the second-half performance in 2020, and it is clearly trading at a much higher run-rate, then earnings per share (EPS) will almost double to 150¢ (110p). On this basis, the shares are rated on a price/earnings (PE) ratio of seven. But net cash has more than doubled to US$192m (356p a share) in the past 12 months, a sum that equates to almost half the current share price. Effectively, Anglo’s shares are trading on only 3.5 times cash-adjusted earnings.

I included the shares at, 570p, in my market -beating 2020 Bargain Shares Portfolio and the price has kicked on 15 per cent since my summer update. Trading on a 27 per cent discount to book value of $558m (1,032p a share), and with the CPO price well underpinned by a positive demand backdrop, a share price rally back to the 2017 price all-time high (886p), and perhaps beyond, looks on the cards. Buy.

 

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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