Palm oil plantations group MP Evans (LSE: MPE), which released its half-year results today, is a stock that appears to be valued by the market at a significant discount to the intrinsic value of the business. I reckon there are good prospects of the shares rerating on continuing operational progress, or of value being outed by a takeover offer. The company has received — and rejected — offers in the past, and there seems to be ongoing interest from informed trade buyers.
Underlying progress
On the face of it, today’s first-half numbers were underwhelming. Revenue from continuing operations was down 6.5% to $53.8m, and operating profit dropped 39% to $10.7m. However, this was due to external factors. Revenue was hurt by a 10% fall in the commodity price of crude palm oil (to $663 per tonne from $735), while the decline in profit mostly reflected a $4.1m unrealised exchange rate loss, as the Indonesian rupiah weakened against the US dollar.
Fluctuations in the palm oil price and currency swings can boost, or hold back, the company’s performance from year to year. However, the underlying progress of the business is the important thing and this continues to be strong. Crops were 27% higher than in the same period last year, with the group increasing its hectarage, and its young plantings maturing. Meanwhile, production costs were reduced by 8% to $350 per tonne, from $380. As an efficient low-cost operator, MP Evans is well-positioned to remain profitable through periods of soft prices (as at present) and to make bumper returns when prices are firm.
Further upside for investors
In late 2016, the company’s shares were trading at around 425p but soared on a 640p offer from £5bn Malaysian conglomerate Kuala Lumpur Kepong Berhad (KLK). This, and a subsequently improved offer of 740p, were rejected by the board and major shareholders on their view that it “very substantially” undervalued the company.
The shares are trading at 768p, as I’m writing (up 1.6% on today’s results), and the company’s market capitalisation is £420m. I continue to rate the stock a ‘buy’, as there are three reasons why I believe there’s further upside for investors. First, the company has made good progress on its growth strategy since the 2016 KLK offer. Second, based on an independent market valuation per planted hectare, the directors estimated group equity value at the last financial year-end of 1,096p a share. And third, KLK hasn’t walked off into the sunset and is still very much on the scene.
Value will out
Very soon after being knocked back by MP Evans’ board and shareholders, KLK began acquiring shares in the company. It crossed the disclosable thresholds of 3% and 10% in January 2017 and has continued to increase its stake. The last notification was as recently as 16 August when it crossed the 15% threshold. KLK clearly sees value in the stock at the current level.
Now, the Malaysian conglomerate may be content to participate in the upside potential of MP Evans as a minority shareholder. Or it may be brewing up for another offer, which would surely have to be at a decent premium to the current share price to win shareholders over. Either way, I believe sooner or later the intrinsic value of MP Evans will be reflected in its share price. In the meantime, a 2.3% dividend yield is not to be sniffed at while waiting.
