MP Evans plans to add another mill

MP Evans (MPE) marked its 150th anniversary by increasing its dividend by more than a fifth, processing 1.5mn tonnes of crops for the first time, and moving into a net cash position. But the Indonesia-focused palm oil producer’s profits fell after a $14mn (£11mn) one-off inflow from the sale of land inflated the previous year’s results, and the company was also hit by higher fertiliser costs.

Chief executive Matthew Coulson told Investors’ Chronicle that "we can start to think about adding mill number 7" after the company purchased 2,100 planted hectares near its Simpang Kiri estate in Sumatra. The board is keen on further expansion, with several other projects under review. 

The chunky annual revenue increase was driven by both increased production and crude palm oil (CPO) prices. Palm oil production rose by 9 per cent to 342,000 tonnes, with production at the newest mill, Musi Rawas, up by 57 per cent. The average mill-gate price received by the company rose by 5 per cent to $854 per tonne. Prices moderated in the second half of the year, after booming as a result of Russia’s invasion of Ukraine, but have still been above $800 per tonne for recent post-year end contracts.

Despite the top-line boom, profitability went backwards. As well as the non-recurrence of the land sale inflow, elevated fertiliser and fresh fruit bunches costs also hurt. Management said that some fertiliser categories had seen inflation of over 100 per cent, but that costs have since gotten back to historical levels. Gross margin fell by 410 basis points to 33.4 per cent.

Sustainability remains a ubiquitous concern with the palm oil industry. On that front, 64 per cent of the company’s output in the year was certified – by the Roundtable on Sustainable Palm Oil (RSPO) on a mill-by-mill basis – as sustainable, up from 55 per cent in 2021. Year-on-year sustainability premia rose from $4.3mn to $7.5mn. 

FinnCap analysts said of the new net cash position that “the increased balance sheet firepower increases MP Evans’s optionality to exploit further sensible new land opportunities and raise returns to shareholders via dividends and further share buy-backs”.

For investors who are comfortable with the company’s sustainability credentials, MP Evans looks like an attractive option. House broker Peel Hunt said that the company is on track to process 1.8mn tonnes of crops by 2025.  And analysts value the shares at 10 times forward earnings, according to the FactSet consensus, which is well below the 5-year average of 18 times. Buy.

Last IC view: Buy, 818p, 12 Sep 2022