Bargain Shares: Slick performers

The crude palm oil (CPO) price has been on a strong recovery since April 2020, driven by an imbalance between supply and demand. That’s because global consumption has been growing at an average rate of 7 per cent a year since 1990, rising eight-fold to almost 80mn tonnes, buoyed by rising income per capita in emerging economies. China, India and South-East Asia account for around 40 per cent of global demand.

However, new supply has failed to keep pace with rising consumption in recent years, a situation that has been exacerbated by low CPO prices in 2018 and 2019 which led to less planting. CPO, together with its related product, palm kernel oil, is derived from the fruit of the palm oil and is one of the four major vegetable oils, accounting for 35 per cent of total vegetable oil consumption. Non-food applications include use in bio-diesel (23 per cent of palm oil consumption) and oleochemicals. The quadrupling of the oil price since April 2020 is supportive of the use of CPO as feedstock for bio-diesel.

The strong fundamentals and potential for a major profit recovery explain why I included Anglo-Eastern Plantations (AEP:880p), a producer of CPO and rubber from 16 plantations spread across 128,000 hectares in Indonesia and Malaysia, in my 2020 Bargain Shares Portfolio. Anglo has not disappointed. Bumper annual results reflected a 67 per cent rise in the average CPO (ex-Rotterdam) price to $1,211 per metric tonne (mt), and a 37 per cent higher ex-mill price of $776 per mt. The discount to ex-Rotterdam prices reflects logistic costs that buyers are required to pay, Indonesian CPO tax and levy.

Anglo’s eye-catching 136 per cent increase in annual pre-tax profit to $137mn (£109mn) also reflected 17 per cent higher CPO production of 473,000 mt, buoyed by improved weather that enhanced yields and a sharp rise in bought-in crop from smallholders.

Furthermore, Anglo’s annual results are for a reporting period before the outbreak of war in Ukraine which has further exacerbated the imbalance in the CPO market. That’s because both Russia and Ukraine are major producers of sunflower oil, jointly exporting around 70 per cent of worldwide production. CPO is seen as a ready replacement, hence why CPO (ex-Rotterdam) prices surged to a high of $2,050 per mt in March 2022, up from $1,305 per mt at the start of this year, before settling at the current price of $1,765 per mt.

The market backdrop is clearly positive for Anglo even though it led to the Indonesian government imposing a ban last week on the export of CPO to try to stem the rising cost of domestic cooking oil. While the ban is in place, it will impact the tender price Anglo will achieve as the CPO is sold locally. That said, it is likely to be only a temporary measure as CPO is one of Indonesia's largest export revenues, and the country is unable to consume or utilise all the CPO it produces.

This explains why Anglo’s share price is still trading close to last month’s all-time high (930p), having passed through the previous record high (886p) set in 2017. The attractive valuation is the other reason: net of cash on the balance sheet the shares are priced on 2.2 times last year’s net profits (based on an ex-mill price of $776 per mt) even though the spot CPO (ex-Rotterdam) price of $1,765 per mt is a third higher than at the start of 2022. Anglo’s market capitalisation is also in line with equity shareholders’ funds (adjusted for non-controlling interests), a valuation that ignores the possibility that net cash could back up all Anglo’s market capitalisation by the end of 2023. Moreover, the group is exiting three loss-making plantations, another positive for the 2022 results as is this year’s 8.2 per cent depreciation of sterling against the US dollar, which boosts the sterling value of Anglo’s earnings.

Anglo’s share price has risen 54 per cent since I included the shares in my 2020 Bargain Shares Portfolio and is 17 per cent up since I covered the third-quarter results (‘Bargain shares: Fuelled for a rally to record highs’, 2 November 2021). Admittedly, the dividend is miserly, but Anglo's board will have to do something with its burgeoning cash pile at some point. Expect new share price highs when the export ban is lifted. Buy.

Hargreaves delivers yet another upgrade

• 20 per cent profit upgrade for 2021/22 financial year, and 6 per cent for 2022/23
• Buoyant pig iron and zinc prices benefit German metals trading subsidiary, HRMS

Surging commodity prices have driven the seventh profit upgrade in the past 12 months from Hargreaves Services (HSP:600p), a diversified industrial services group and brownfield land developer.

German metals trading subsidiary, HRMS, a key supplier of specialist raw materials to European customers in the steel, smelting, ferroalloy, limestone, and ceramic industries is performing so strongly that Hargreaves expects to outperform consensus post-tax profit estimates by £5mn for the 12 months to 31 May 2022. Analysts at Singer Capital Markets have taken note, raising their full-year pre-tax profit and earning per share (EPS) estimates by 21 per cent to £29.4mn and 86.5p, respectively.

Moreover, the directors expect some additional benefit (£1.5m profit after tax) to fall into the first quarter of the new financial year, so Singer has pushed through 6 per cent pre-tax profit and EPS upgrades to £25.3mn and 71.7p, respectively, for the 12 months to 31 May 2023. They have also raised their sum-of-the-parts target price to 710p (from 690p).

Hargreaves' share price has risen from 560p to 600p since I last suggested buying (‘Profit from soaring commodity prices’, 24 March 2022), and has almost trebled in value since I initiated coverage, at 206p (Alpha Report: ‘A high yielder offering significant hidden value’, 19 March 2020). The board has paid out 23.8p a share of dividends, too, and expect a 17.6p a share payout to be declared at the forthcoming annual results.

Trading on eight times 2022/23 earnings estimates, and offering a 3.5 per cent prospective dividend yield, the modest rating is at odds with the ongoing strong operational performance. Buy.

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