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One approach

If someone had an ISA worth £500,000 and earned a 4% annual return from a portfolio of dividend shares, they would be able to generate £20,000 a year, or £1,667 a month.

I admit that half a million pounds sounds like a lot of money. In fact, it IS a lot of money. But if someone starting with £1,000 was able to supplement this with a monthly investment of £100, they could get there reasonably quickly with a successful stock-picking strategy.

For example, it they could achieve an annual growth rate of 15.3%, it would take 26.5 years to build an investment pot of over £500,000. Someone starting in their early 20s could have an impressive nest egg by the end of their 50s. At this point, they might then choose to shift focus and use dividend shares to create a second income stream.

Is this really possible? In theory, yes.

Something to consider

Take MP Evans Group (LSE:MPE), the Indonesian palm oil producer, as an example. Since April 2021, it’s experienced an average increase of 15.3% in its share price. This excludes any benefit from buying more shares using the group’s generous dividend. The stock’s currently (2 April) yielding 4%.

Of course, capital growth and dividends can’t be guaranteed. Indeed, the size of MP Evans’ crop is dependent upon weather conditions and how effective it is at controlling pests and disease. And the price it receives for its oil is determined on international markets, which can be volatile.

However, the group has an impressive track record of dealing with these challenges and — as a result of a 396% increase in earnings per share — has seen its dividend grow by 65% since 2012. To have kept pace with inflation, its 2012 payout would need to have increased to 11.66p by 2025. But it’s done much better than this. Last year, it declared a dividend of 60p.

And I see no reason why this shouldn’t continue.

Strong prospects

The global market for palm oil — the world’s most traded vegetable oil — is currently worth around $70bn. And it’s forecast to grow significantly over the next 10 years.

To take advantage, the group continues to plant more hectares. It also emphasises the sustainable nature of its product and works with local co-ops to maintain good relations.

However, despite its above-average dividend and recent strong share price performance, the stock flies under the radar. With an attractive 2025 earnings multiple of 9.2, I think the market has yet to price in its full potential.

Of course, it wouldn’t be sensible to have a portfolio of just one stock. But I think MP Evans could be considered by an investor looking to build long-term wealth — using a well-diversified Stocks and Shares ISA — with the eventual aim of creating a dividend income stream.

It’s one example of a UK-listed company that quietly goes about its business and has consistently delivered above-average shareholder returns. 

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Let’s take a closer look.

Who?

I think the Indonesian sustainable palm oil producer could be one of the unsung heroes of the UK stock market.

It doesn’t do anything particularly exciting and is unlikely to be impacted in a major way by the emergence of artificial intelligence. It’s as far away from a tech stock as you can possibly get. After all, making money from crop production is as old as the hills themselves. And yet shareholders have been rewarded with capital growth and a strong dividend over the past few years.

But can this continue?

Although the group’s yet to finalise its results for 2025, we know that it harvested 4% fewer fresh fruit bunches than in 2024, and produced 3% less palm oil. However, realised crude palm oil prices were 5% higher and the group was able to sell its palm kernels for 42% more.

For the 12 months to 30 June, earnings per share was 156.4p. This means the stock presently trades on a very attractive 8.4 times historic earnings. This is despite its share price rising 24% since January 2025 and nearly doubling over the past five years. To the frustration of the group’s directors, its earnings multiple’s lower than its international peers.

And then there’s the dividend. Based on amounts paid over the past 12 months, the stock’s yielding a very respectable 4.3%. In cash terms, its 2024 payout was 138% higher than in 2020.

An unsung hero?

However, farming’s a tough business. The group’s crop yield is heavily influenced by the weather. Indeed, one of its estates was flooded in December, although there was minimal impact on production. And there’s the twin threats of disease and pests.

Also, ethical investors have turned their backs on the sector due to the palm oil industry earning itself a reputation for causing environmental damage. This means there’s potentially a smaller pool of investors available to help push the group’s share price higher. MP Evans seeks to address these concerns by operating in a sustainable manner and working in partnership with local producers and co-ops.

Despite these challenges, the group’s shares look undervalued to me. And the three analysts covering the stock appear to agree. They have 12-month share price targets of 1,717p, 1,570p, and 1,472p, all comfortably above its current (30 January) price of 1,310p.

Demand for palm oil’s expected to rise at over 4% a year until 2035. And certified sustainable oil is a key driver of this. The group continues to plant new areas and intends to enter into more partnerships with smallholders. As a bit of a side hustle, it also has a 40% interest in a Malaysian property development company, which owns 195 hectares of land.

On balance, I think MP Evans is a stock to consider for both its growth and income potential.

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This could be due to the fact that its primary assets are located on the other side of the world. It might be a case of out of sight, out of mind. The group has substantial interests in Indonesia where it owns six palm oil mills, 49,800 hectares of majority-held palm oil plantations and a further 16,200 hectares in smallholder co-operative schemes. It also has a 38% interest in a large estate and a 40% share in a property development company in Malaysia.

But like any agricultural business, its earnings are dependent on two factors – market prices and crop yields — that are largely outside its control. This means its profit can be volatile.

A growing but contentious market

However, palm oil is the most traded vegetable oil in the world. Demand has doubled over the past 20 years. It’s now used in food, cosmetics and cleaning products.

But it can be controversial. The industry has been accused of engaging in mass deforestation and human rights abuses.

That’s why MP Evans emphasises the sustainable nature of its crop and its partnerships with local communities.

Valuation metrics in the sector

Based on the group’s earnings per share for the 12 months to 30 June, its stock trades on a multiple of 8.5. This seems very attractive compared to the average for the UK stock market of around 19.

Having said that, two of its closest FTSE rivals appear cheaper. Anglo-Eastern Plantations, which produces palm oil and rubber in Indonesia and Malaysia, trades on 5.7 times earnings. R.E.A. Holdings, which also produces palm oil in Indonesia, has a multiple of 1.8.

But neither of these companies can match the dividend yield of MP Evans.

Today, the group announced that it was increasing its interim dividend by 20% to 18p. Add this to last year’s final payout of 37.5p and the stock offers a healthy yield of 4.2%. Of course, there are no guarantees when it comes to shareholder returns.

Pros and cons

But anyone wanting to take a stake needs to be comfortable with the fact that its earnings are likely to be unpredictable. Bad weather conditions (too dry or too wet) can adversely affect yields and the long-term impact of climate change on the group isn’t yet known. Pests and disease could also present a problem.

However, palm oil prices have been reasonably stable since the middle of 2022 and the group continues to expand. It’s recently added another 3,000 planted hectares to its portfolio.

It also retains a strong balance sheet having moved to a net cash position of $70.3m at 30 June — 12 months earlier, it reported net debt of $7.5m.

And then there’s the dividend. It’s grown by an average annual rate of 24.3% over the past four years.

On balance, I think MP Evans is a stock worth considering.

The post Here’s 1 interesting under-the-radar UK stock to consider appeared first on The Motley Fool UK.

Take M.P. Evans Group (LSE:MPE), the Indonesian palm oil producer, as an example.

Good for income and growth

In respect of its 2024 financial year, the group’s declared a dividend of 52.5p a share, an increase of 17% on the previous year. This means the stock’s presently yielding a very respectable 5.3%.

The company first paid a dividend in 1993. Since then, it’s increased (or maintained) its payout every year. More recently — since 2020 — it’s grown by an average annual rate of 24.3%.

Also, over the past five years, its share price has risen by an annual average of 17%.

This is an impressive combination.

Assuming the stock continues to yield 5.3%, and its share price performance over the past five years is repeated for another two decades, a £10,000 investment made today would grow to £649,060. This assumes all dividends are reinvested, buying more shares.

At this point, the stock would be generating annual passive income of £34,400.

However, this type of analysis comes with some health warnings. There’s no guarantee that history will be repeated. Almost inevitably, its rate of growth will slow. And it’s never a good idea to put all of your money into one stock.

But it does give an idea of the potential return available from a high-yielding growth share.

And now could be a good time to invest. That’s because, despite its impressive rate of growth, the company appears to be undervalued compared to its peers, including some of its larger Asian rivals.

In 2024, M.P. Evans Group reported earnings per share of 129.6p. This means its historical price-to-earnings (P/E) ratio is 7.8. In contrast, Sime Darby has a P/E ratio of 13.6. Wilmar International trades on a multiple of 10.1.

Some concerns

But the production of palm oil is controversial. Historical allegations of widespread deforestation and the exploitation of labour have damaged the reputation of the industry. M.P. Evans Group has sought to overcome this by promoting its sustainable credentials. It’s been certified by the Round Table on Sustainable Palm Oil (RSPO). 

Also, it’s entered into a number of partnerships with local producers. In return for offering land to the group, members of these cooperatives receive compensation, a wage, and a share of the revenue.

Like other commodities, the price of palm oil can be volatile. It spiked after Russia invaded Ukraine, although it’s been relatively stable since the summer of 2022.

Crucially, weather conditions can affect a crop. In 2024, the group’s production was 1% lower than in the previous year. However, this was more than compensated for by a 13% increase in the average price earned.

Other potential problems include pests, disease, and floods.

But I think the stock has lots going for it.

Palm oil is used in half of the packaged products found in a typical supermarket. And the trees from which it comes are highly productive. The group’s track record of steadily increasing its dividend is also encouraging. On balance, I think it’s a stock that long-term investors could consider adding to their portfolios.

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The palm oil business

MP Evans focuses on producing sustainable crude palm oil in five provinces across Indonesia. It also has a stake in a property company in Malaysia. The company’s shares trade on the AIM market of the London Stock Exchange.

As a cyclical business, it experiences fluctuations in output due to crop maturity and weather conditions, among other factors. This can lead to share price volatility. For example, after strong expansion from 2020 to 2023, the company faced a dip from 2023 to 2024. Now, it’s entering a new phase of moderate growth.

Cheap, growing, and cash flow generating

Here are two core highlights of why I think this investment is worth my cash:

1. It has a three-year average annual earnings per share (EPS) growth rate of 41%.
2. It has a low price-to-earnings (P/E) ratio of 9.5, which is much lower than the industry median of nearly 18.

However, that high historical growth isn’t likely to last. In fact, analysts predict that the company will generate just a 6.2% average annual EPS growth rate over the next three to five years. This is a big reason why the shares have fallen in price recently.

Low prices mean bargain opportunities

Just because a price has fallen doesn’t mean that it’s bad for investors. Instead, a lower price can open up a better valuation. There’s a lot of merit in Warren Buffett’s saying: “Be greedy when others are fearful”.

In the case of MP Evans, its leading valuation ratios, namely the P/E and the price-to-sales (P/S) ratio, are near the lowest they’ve been since January 2020.

This opens up a big opportunity for me. It gives me a margin of safety in the price, meaning that any operational failures are unlikely to hit the shares as severely as if they were richly valued.

Also, my returns are likely to be higher. The fact that the valuation is so low and analysts are expecting better earnings growth over the next few years is likely a big reason why bankers have such high price targets for the stock right now.

What could go wrong?

In my opinion, this is a low-risk investment. However, there is one big issue that stands out to me.

While the shares have seen a long-term uptrend in price since 1988, as I mentioned earlier, they’ve also shown considerable volatility. With its price going up and down over time, its even more important I buy at an appropriate valuation.

Furthermore, its dividend payouts are not usually as high as right now. I suspect such a substantial 5% yield will be transitory, so I can’t rely on this investment for cash flow stability.

It’s a Buy for me

I consider this one of the best hidden gems on the UK stock market right now. It’s at the top of my watchlist, and it’s a likely addition to my portfolio at the beginning of October.

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But skilful investors can do well picking value shares if they’ve been driven down too far by the market. Indeed, valuations can re-rate higher. And that’s especially true if conditions in the business begin to improve.

Sometimes share price gains can be worth the wait. But it’s equally possible to pick a cheap-looking share that struggles to recover. Or, even worse, the stock may sink lower despite looking like a bargain the whole time.

Hospitality

I think several stocks are worth further consideration and deeper research right now. For example, managed restaurants and pubs operator Mitchells and Butlers looks cheap on a couple of indicators.

With the share price near 164p, the price-to-tangible book value is around 0.45. And the price-to-sales ratio is about 0.43.

However, the company carries a lot of debt. And that could become problematic if trading in the business turns down.

There’s a history of volatile earnings showing the business is at the mercy of swings in the general economic cycle. But that can work both ways and drive the share price higher if earnings gain traction in the years ahead.

Meanwhile, January’s first-quarter trading update contained some strong figures. And I’d describe the outlook statement as optimistic but cautious.

Building products

Ibstock makes clay and concrete building products. And with the share price just above 168p, the forward-looking price-to-earnings multiple is a little under 11 for 2024.

However, the main attraction is the dividend. City analysts anticipate a yield of just under 5% for next year.

But the firm’s financial and trading record shows multi-year volatility for both earnings and the dividend. And that betrays the cyclicality in the business, which adds risks for investors.

On 8 March, the company posted a decent set of figures for 2022. But the directors said activity in the early weeks of 2023 was weaker. And that followed “more cautious” demand in the fourth quarter of 2022.

Commodities

M.P. Evans (LSE: MPE) is a UK-based company that owns, manages, and develops sustainable oil-palm estates in Indonesia. 

The main attraction for this stock is the forward-looking dividend yielding just over 5% for 2024. And with the share price near 860p, the anticipated earnings multiple is just above nine for next year. 

Those figures combine with a price-to-tangible book value of around 1.2 to make the overall valuation look undemanding.

Meanwhile, revenue and the dividends have performed well over several years. But the business has a volatile earnings record. 

And the main risks include the vulnerability of crops to destructive natural events and fluctuating palm oil prices. However, the company has managed to achieve a net cash position on its balance sheet rather than net debt. And the business has been growing organically and via acquisitions.

There are opportunities and threats for these three businesses. And a positive investment outcome isn’t guaranteed. Nevertheless, they are each worthy of further and deeper research for investors willing to take a long-term view of their prospects. 

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The company continues to impress with its balance sheet. Liquidity looks great as current assets are at least twice what current liabilities are. A debt-to-equity ratio of 0.35 means low leverage. So far so good. But the business that M. P. Evans is in makes me pause for thought.

Problematic palm oil production

In 2015 I was in Penang, Malaysia. The air was hazy and smelt of smoke. This smog had drifted across the sea from Indonesia where forests were burning. The World Resources Institute suggests most of the fires are human-caused and linked to the agriculture industry, particularly palm oil, of which Indonesia is the world’s largest exporter.

M. P. Evans is a producer of Indonesian palm oil. It does, however, make a case that it does this sustainably. All the palm oil produced from company-owned estates is certified sustainable according to the Roundtable for Sustainable Palm Oil’s standards. The same is true for managed smallholders. But the company also accepts oil palm fruit from non-verified independent growers for its mills. As of 2020, the date of the last standalone sustainability report, 27% of the total production could not be confirmed as sustainable.

The plan is to increase that number to 100% by sometime next year. That would be reassuring. But why accept unverified products at all? Why not only take from smallholders where the company is satisfied they produce sustainably? Well, because the company can process significantly more oil-palm fruit than it and its verified smallholders can grow.

Small-cap stock watchlist

M. P. Evans is also currently exiting its property development operations in Malaysia. It disposed of 70 hectares of land from a wholly owned subsidiary to a joint venture in 2021. It still has 200 hectares left. I am likely being cynical, but this arrangement does suggest there is scope to sell off parcels when group earnings are not expected to meet forecasts. However, I like M. P. Evans’s plan to focus on one thing: palm oil.

Palm oil is the world’s most popular and most traded vegetable oil. Demand for it has increased by 7% each year since 1990. According to one report, about half the products in UK supermarkets contain palm oil. It appears to be a decent business to be in. And the company’s operating numbers support this.

However, it’s worth pointing out that the company’s operating margins tend to dip when the average annual price of crude palm oil falls and rise when it rises. That’s because it is a price taker in a commodity market.

All things considered, although M. P. Evans is now deservedly on my watch list, it won’t end up in my Stocks and Shares ISA just yet. The next standalone sustainability report is due soon. I would like to see what progress has been made on this front and see how I feel about this small-cap stock then.

The post Can I learn to love this small-cap palm oil stock? appeared first on The Motley Fool UK.

UK value stocks #1

M.P. Evans Group (LSE: MPE) is a producer of sustainable crude palm oil from plantations in Indonesia. Its well invested estates and strategy of steady expansion underpin its commitment to pay attractive returns to investors through increasing dividends.

This £346m-cap FTSE AIM 50 stock trades at a discount to Asian peers. A few years ago, shareholders resoundingly rejected a 740p-a-share offer from one such peer on the grounds it substantially undervalued the business. The latest independent valuation of its assets gives the group an equity value of 1,001p per share.

The share price is 635p, as I’m writing. This is a 14% discount to the rejected offer and a 37% discount to the independent valuation. With the prospect of steady asset expansion, rising profits and increasing dividends, MPE’s shares look very buyable to my eye.

UK value stocks #2

Another business I’d be happy to buy a slice of is Ocean Wilsons Holdings (LSE: OCN). This one is listed on the FTSE main market, and has a capitalisation of £241.4m.

OCN has a controlling 58.16% interest in Sao Paolo-listed Wilson Sons — one of the largest providers of maritime services (towage, container terminals and so on) in Brazil. OCN also has a portfolio of around 80 international fund investments (e.g. Findlay Park American and Adelphi European Select Equity).

Based on Wilson Sons’ latest share price, and current exchange rates, OCN’s interest in the business can be valued at £243.4m. This is equivalent to 688p per OCN share. Meanwhile, the value of its investment portfolio last reported (31 October) was £211m, or 597p per OCN share.

Therefore, the sum of 688p and 597p gives OCN shares an intrinsic value of 1,285p. Yet they’re trading at 682.5p — an implied discount of 47%. Put another way, OCN shares buy you Wilson Sons at a small discount to its price on the Sao Paolo stock exchange and you get the £211m investment portfolio thrown in for free. My calculations suggest OCN is another top value stock on the UK market.

A cornucopia of cheap assets

Finally, I’d also be happy to buy FTSE 250-listed AVI Global Trust (LSE: AGT). It scours the globe for opportunities — typically holding companies and closed-end funds — where the price is at a significant discount to the estimated underlying net asset value (NAV).

For example, its top 10 holdings at its last year-end (30 September) included Pershing Square (estimated discount 30%), Softbank (56%) and Prosus (34%).

And AVI Global’s holdings each own, or have an interest in, a number of assets. For example, you’ll find coffeehouse chain Starbucks, and Chinese technology giants Alibaba and Tencent in the portfolios of Pershing, Softbank and Prosus respectively.

In addition to the discounts to NAV of its holdings, AVI Global is trading at a discount. Its share price of 794p is just over 10% below its last reported NAV of 883p (at market close on Thursday). As such, it’s another great UK value stock in my book.

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The first is FTSE 100 private healthcare group NMC Health (LSE: NMC). It’s the leading operator in the Gulf Cooperation Council region, whose member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The second is MP Evans (LSE: MPE), a well-established producer of palm oil in Indonesia.

Price pain but profitable

In its annual results, released today, MP Evans reported a 32% increase in crops to 573,000 tonnes, and record production of crude palm oil — up 25% to 192,500 tonnes. Meanwhile, costs were down by 14% to $320 per tonne of palm product.

However, one thing outside the company’s control is the price of palm oil. Record production and reduced costs could not outweigh a year of significantly lower palm-oil prices in 2018. The company remained profitable, but profit from continuing operations fell to $7.2m from $27m in 2017.

The share price was down as much as 10% to 620p in early trading, but has recovered to 652p (down 5%), as I’m writing. This represents a whopping 86 times today’s reported earnings per share (EPS) of 9.9 cents (7.6p at current exchange rates). However, the outlook for 2019 and beyond is much brighter. And this gave the board confidence to maintain the 2018 dividend at 17.75p (running yield 2.7%).

Rising earnings ahead

The palm oil price has recovered from a low point of $440 per tonne in the middle of November to $520 per tonne at the end of March, and the futures market is anticipating significant further price increases to come.

Ahead of today’s results, forecast EPS for 2019 stood at 42 cents (32p), rising to 54 cents (41p) for 2020. So on a forward basis, we’re looking at 20.4 times EPS, falling to 15.9 times. This is a well-managed business, with many years of increasing production ahead, and I rate the stock a ‘buy’ at the current price.

Multi-year growth story

There was no annus horribilis for NMC Health in 2018. The company delivered another year of record revenues and profits. EPS growth to 133 cents (102p) was in line with its four-year annual average of around 30%. Strong growth is set to continue, with EPS of 177 cents (135p) forecast for 2019, followed by 219 cents (167p) for 2020.

A current share price of 2,420p represents 17.9 times forecast 2019 EPS and 14.5 times 2020’s. Meanwhile, a running yield of 0.75% on a dividend of 18.1p is set rise strongly in the coming years, with the payout tracking the rapid growth in EPS.

NMC is another well-run business, and management has a record of under-promising and over-delivering on guidance. The company’s unmatched geographic reach within its target markets, and significant lead over others in the diversity and complexity of its medical services, are strong competitive advantages. I see another multi-year growth story here, and another stock I’d be happy to buy today.

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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.

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