MP Evans dragged down by lower palm oil prices

Crude palm oil (CPO) prices soared in the aftermath of Russia’s invasion of Ukraine as concerns raged about vegetable oil supply. While prices remain elevated against historic levels, a 27 per cent year-on-year slowdown in the average mill-gate price to $755 (£604) per tonne dented Indonesia-focused palm oil producer MP Evans’ (MPE) revenue by over a fifth. A low-cropping period and a doubling of fertiliser costs also hurt, as the gross margin fell by a painful 21 percentage points to 17 per cent and operating profits contracted by 62 per cent. 

But the wider investment narrative is one of hectares growth and a building up of production potential. The latest acquisition came after the period end at East Kalimantan, where the company has agreed a $60mn deal to buy 8,350 planted hectares. The company bought a further 2,000 hectares near its Simpang Kiri estate in March, and the potential remains for a new mill there. 

Chief executive Matthew Coulson told Investors’ Chronicle that the company “is expecting a real step up in production over the longer term” as a result of hectares growth. Management forecasts that the amount of crop processed will increase by around 20 per cent between 2022 and 2025. 

There are also encouraging signs on sustainability, a persistent concern with the palm oil industry. Sustainable CPO production in the half was 7 per cent higher than last year at 96,500 tonnes, while scope 3 emissions fell 12 per cent between 2021 and 2022. A report on environmental, sustainability and governance (ESG) issues will be available for the market to pore over later this year.

On the return of capital, the maintenance of the dividend and a £2mn extension of the share buyback programme will be welcomed by investors given the challenging results.  

While unit cost pressures are now being helped by a softening of fertiliser costs and an increase in the production of the company's own crops, the market will have to accept the lower mill-gate price environment. The shares trade at an attractive nine times forward earnings, but headwinds remain. Hold. 

Last IC View: Buy, 827p, 21 Mar 2023