MP Evans hikes dividend and makes sustainability progress

MP Evans (MPE) shares have fallen by around a tenth over the past year as softer crude palm oil (CPO) prices have hurt the Indonesia-focused producer's top line. It must be remembered that the high prices seen in 2022 were a result of commodity supply shortages in the context of Russia's invasion of Ukraine. The company reported an average mill-gate price of $729 (£574) per tonne this time, still an attractive price compared with the historic position despite the year-on-year fall from $854 per tonne, and pointed to "some price strengthening" over the first quarter of this year. 

The decrease in revenue, combined with an $11.2mn increase in cost of sales, meant that gross margin fell sharply on an annual basis. This was down from 33.4 to 25.5 per cent. 

A low-cropping period in the first six months hurt, but there were signs of progress in the second half. Total crop processed rose 7 per cent to 1.62mn tonnes, driven by purchases after the opening of the new Musi Rawas mill. 

Given the well-documented environmental concerns with palm oil production, a continual focus on sustainability is essential. Sustainable CPO was up 7 per cent to 233,400 tonnes, and all six of the company's mills are certified to sell CPO as sustainable. 

The dividend was increased despite the downturns in revenue and profit, after the company posted almost $50mn of free cash flow. And share buybacks will be extended through a new £2mn programme. 

The shares trade on a lowly eight times forward consensus earnings, half the level of the five-year average. Combine that with positive noises on pricing and a forward dividend yield of over 6 per cent, and we upgrade to buy. 

Last IC view: Hold, 728p, 11 Sep 2023