Climate change and environmentalism are gaining greater attention around the world. Palm oil production is perceived as a serious offender as cultivation has contributed to deforestation in previously untouched areas, which could affect investors' sentiment towards MP Evans (MPE). Its first-half results for 2019 were not well received by the market, and its share price has been on the decline ever since.
Signs of recovery in palm oil prices
Production becoming more efficient
Environmental impact of palm oil
Analysts downgrading forecasts
Volatile price of crude palm oil
Easily replaced by other oils
Higher volumes of palm-oil production could not compensate for lower prices so far during 2019, leading to a 14 per cent drop in first-half revenue for Evans, which fed through to a £0.6m pre-tax loss compared with a £10.1m profit a year before. Chief executive Tristan Price says the price decline – of a fifth over the period – is a “hangover from 2018” when there was record stock across the industry of both palm oil and other vegetable oils. Palm oil can be easily swapped for other vegetable oils, such as soybean, so demand is highly sensitive not only to palm oil prices, but to prices of competitor oils.
True, the palm oil price is expected to improve, driven in part by increasing imports from India and China. This has started to clear out stock levels and could revive the oil price, but that is always unpredictable. If this improvement in palm oil price does come to fruition, this will affect MP Evans in the latter part of the current financial year, as analysts note that there is typically a six-week delay in the effect given the timing of shipments.
The latest set of results led to downgrades from City analysts. For 2019, broker Peel Hunt cut its expectations for gross profits by 37 per cent, pre-tax profits by 45 per cent, and earnings by 38 per cent. The broker also cut forecasts for gross profit by 11 per cent, profit by 17 per cent and earnings by 7 per cent for 2020.
Evans is working to make the most of its plantations, which are in Malaysia and Indonesia. As part of its drive to greater efficiency, a slight increase in the extraction rate of oil from the crop of palm kernels from 23.4 per cent to 23.6 per cent in the first half was welcome. Management has also been focusing on cost-cutting – the cost of production fell 14 per cent to $320 (£248) a tonne in 2018, but this reversed slightly in the first half of 2019 to $385 a tonne. This was due in part to an acceleration in both field and mill maintenance. Increasing its stake in its Indonesian subsidiaries would also help reduce the company’s minority interest charge.
While palm oil gets a bad reputation, Evans's bosses say they are working to make the production process more sustainable. They estimate that 69 per cent of group production is currently certified as sustainable by the Roundtable for Sustainable Palm Oil (RSPO), and aim to make production 100 per cent sustainable by 2024. But the damage to consumers’ perceptions may already be done; besides, RSPO, an industry body, has come in for much criticism from environmentalists.
|M.P. Evans (MPE)|
|ORD PRICE:||624p||MARKET VALUE:||£340m|
|FORWARD DIVIDEND YIELD:||4.1%||FORWARD PE RATIO:||17|
|NET ASSET VALUE:||559p||NET DEBT:||8%|
|Year to 31 Dec||Turnover ($m)||Pre-tax profit ($m)*||Earnings per share (ȼ)*||Dividend per share (ȼ)|
|Normal market size:||500|
|*Peel Hunt forecasts, adjusted PTP and EPS figures|