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MP Evans Group — Update 23 November 2016

MP Evans Group — Update 23 November 2016

MP Evans Group

Analyst avatar placeholder

Written by

MP Evans Group

Expansion strategy on course

Company profile

Consumer

23 November 2016

Price

680.0p

Market cap

£379m

US$1.24/£

Net debt (US$m) at 30 June 2016

6.6

Shares in issue

55.7m

Free float

89%

Code

MPE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

Business description

MP Evans Group has assets consisting of oil-palm plantations (both majority and minority held) in Indonesia and residential property development in Malaysia. Its strategy is to continue to expand its oil-palm areas in Indonesia in a sustainable and cost-effective manner and to capitalise on the value of its Malaysian operations using any sale proceeds to fund the continuing Indonesian development.

Next events

Final results

April 2017

Analyst

Paul Hickman

+44 (0)20 3681 2501

Edison Investment Research Limited is a connected adviser to MPE for the purposes of the UK Takeover Code

MP Evans is an AIM-listed palm oil producer with operations in Indonesia. Despite a short-term climate-driven trading setback, the strategy of expansion and development of its core business is on course, with a strong balance sheet further reinforced by recent non-core disposals. Management, with support of 41% of shareholders, has rejected a 740p hostile approach by KLK, a Malaysian plantation company, on the grounds that it very substantially undervalues the shares.

Historic results

Year
end

Revenue (US$m)

PBT*
(US$m)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/12

83.2

12.2

27.7

8.00

30.4

0.9

12/13

82.2

6.5

26.3

8.25

32.1

1.0

12/14

90.0

24.1

45.4

8.75

18.6

1.0

12/15

72.5

6.8

43.4

8.75

19.4

1.0

Source: Company reports. Note: *group-controlled.

Focused on the palm oil strategy

MP Evans (MPE) is a UK AIM-listed agri-business group producing palm oil in Indonesia. Its operations extend over majority-owned oil-palm plantations, smallholder co-operative plantations and minority interests in further plantation estates. Its strategy is focused on continuing to expand its oil-palm operations in a sustainable and cost-effective manner, and improving standards and productivity.

Interims: Temporary trading weakness, strategic sale

Interim profit after tax rose 17% to US$18.0m, but this includes a $7.4m profit on the strategic sale of an Australian cattle business. Continuing post-tax profit fell 4% to $6.3m on several factors, but underlying trading was weak on exceptionally dry El Niño conditions and a weak palm oil price, both of which appear temporary.

Final* offer rejected by board

On 25 October 2016 MPE received a hostile 640p cash offer from KLK, a quoted Malaysian plantations company. This was increased to 740p in a revised, final* offer. Both offers were rejected by the board, on the grounds that they very substantially undervalued the company. The rejection of the final* offer was supported by 40.9% of shareholders confirming their intention not to accept it.

Valuation: Earnings, cash, and property

As MPE is in a bid situation we are not permitted to discuss forecasts or earnings multiples. However, we note that since the half year, MPE has received A$107m (US$80m) proceeds from the Australian disposal. It also has substantial Malaysian property interests. MPE has indicated a targeted 2023e owned crop 77% higher than 2015, which indicates the company’s scale potential. We have not estimated the cost of such expansion, the future value of which would need to be discounted.

* There were two caveats to the offer being final: (i) a public announcement of the existence of a new offeror or potential offeror, whether publicly identified or not; or (ii) the recommendation of such an increased offer by KLK or its subsidiary KLKI by MPE’s board.

Company overview: Focus on palm oil

Main activities: Oil-palm plantation owner and operator

The company controls 26,600 hectares of majority-owned oil-palm plantations. It also has 8,100 hectares of smallholder co-operative oil-palm plantations where it develops and manages plantation land on behalf of local co-operative members, purchasing their production at a government-regulated price. Separately and in addition it has JV and minority interests equivalent to a further 8,100 planted hectares. The group’s palms are on average a young 7.9 years old, giving many years of production ahead given the plants’ productive life of 25-30 years.

Strategy: To drive growth through planting and expanding

MPE has a strategy focused on plantation operations as the key driver of revenue and profit growth. Previous cattle farming operations in Australia have recently been disposed of, and development land in Malaysia is being sold on an individual basis, with an objective of ultimate exit.

The strategy on the company’s ongoing oil-palm operations, centred in Indonesia, is:

■

To invest further in a fast-growing, low-cost food commodity;

■

To expand the group’s oil-palm areas in Indonesia in an environmentally-sustainable manner; and

■

Continually to maintain and, where possible, improve agronomic standards and productivity.

The strategy is working effectively as indicated by compound average annual growth in production of 30% between 2011 and 2015.

History and management

The company has had continuous involvement in Far Eastern plantation operations since being founded around 1870. The management team has a track record of successfully developing and adding value to agricultural assets. The board has a mix of industry and independent experience, and the five non-executive directors include the former chief executive, and the current chairman of R.E.A. Holdings, another palm oil operator.

The palm oil market

Palm oil is used mainly as a cooking oil, but also in margarine, baked products, soap, cosmetics, lubricants and increasingly in bio-diesel. Global production has increased by a compound 6.6% over the last five years, and demand is projected to rise by around 5% in 2016/17, according to the World Bank, with prices firming over the next decade. In 2015, 56% of total world production of 59m tonnes was from Indonesia, with a further 20% from Malaysia.

Over the last three years the crude palm oil (CPO cif Rotterdam) price has varied between US$992 per tonne in early 2014 and US$500 in mid-2015. Starting 2016 at US$580, it strengthened during the first half as a result of demand ahead of Chinese New Year, reduced stocks, increasing biodiesel production and concern over dry weather in South-East Asia. The price is currently around US$735 per tonne.

Interim results

Total profit after tax increased 17% to US$18.0m. However, this includes the $7.4m profit on the sale of the Australian cattle business NAPCo, which, together with its trading results, was included in discontinued operations.

Continuing operations’ post-tax profit declined 4% to $6.3m as a result of several opposing factors:

■

Weak plantation result on exceptionally dry weather, with revenue down 20%. This is expected to be temporary.

■

Extraction rates were firm at 25.1% weighted across the plantations.

■

The average CPO price was similar year-on-year at US$668 per tonne; however, this was affected by a new export levy of US$50 per tonne, which has an impact at prices of less than US$750 (the tax regime at prices above US$750 per tonne is effectively unchanged).

■

Direct costs were higher as a result of a fixed cost element within cost of sales representing activities such as weeding, pruning and fertilizing. As a result, gross margin was down from 23.3% in the first half of 2015 to 16.9%.

■

Group-controlled operating profit was up 8% to US$5.1m; however, this included a US$5.3m favourable movement on foreign exchange gains and losses.

Not apparent in the headline numbers was the considerable progress made on planting, with 1,980 hectares planted in the group’s owned and operated areas, in addition to preparations for planting in a further 5,100 hectares.

The balance sheet is strong with net borrowings of US$6.6m, gearing of only 2%. This was before the A$107m (US$80m) proceeds from the sale of its Australian cattle business NAPCo, which completed in July 2016, after which the group should be in a significant net cash positive position.

Offer for the company

On 25 October Kuala Lumpur Kepong Berhad (KLK), through its wholly-owned subsidiary, KL-Kepong International Ltd (KLKI), announced a hostile offer for the company at 640p per share in cash. KLK is a Malaysian plantations company capitalised at RM23.5bn (c £4.5bn). The offer was formally rejected by the MPE board on the grounds that it very substantially undervalued the company. The rejection was supported by a majority 54.7% of the company’s shareholders who confirmed their intention not to accept the offer.

On 15 November KLK announced a revised and final offer of 740p per share. There were two caveats to its being final:

(i)  a public announcement of the existence of a new offeror or potential offeror, whether publicly identified or not; or

(ii)  the recommendation of such an increased offer by KLK or KLKI by the board of MP Evans.

This was also rejected by the MPE board on the grounds that it, too, very substantially undervalued the company. The rejection was supported by 40.9% of the company’s shareholders, who confirmed their intention not to accept the revised offer.

In both cases, the company’s rejection announcement included comment to the effect that:

The othe company’s rejection announcement included comment to the effect that:

■

The offer did not reflect the value of the estates, JVs, smallholder co-operatives and property assets.

■

It did not take into account the company’s operational quality, with high-yielding palm oil estates and industry-leading mill extraction rates.

■

Plantings are on average, young, suggesting that production will increase substantially in coming years.

■

The strategic plan includes a significant increase in planted hectarage and further palm oil mills.

■

The balance sheet is strong, providing a platform for further growth through acquisition of additional planted areas and the development of unplanted land.

■

Global demand for vegetable oils continues to rise and palm oil has grown as a proportion of that demand, indicating strong long-term prospects for the company’s output.

KLK posted its offer document to shareholders on 18 November 2016. MPE is to publish a circular to shareholders within 14 days of the offer document.

Valuation

As the company is in a bid situation we are not permitted to discuss forecasts or earnings multiples. However, we make the following limited comments:

■

Since the half year the company has received A$107m (US$80m) from the sale of its Australian cattle business NAPCo, which completed in July 2016.

■

In addition the group has substantial property interests in Malaysia. It owns Bertam Estate with 70 hectares of land in Peninsula Malaysia, which it intends to sell when market conditions are deemed suitable. It also has a 40% interest in Bertam Properties Sdn. Berhad (Bertam Properties), which has a land bank of 330 hectares near Penang Island, Malaysia.

■

The company indicated in its 2016 interim presentation that it saw its 2023 crop totalling some 1m tonnes, of which majority group interests would contribute some 750,000 tonnes and co-operatives some 260,000 tonnes. These represent a 77% and 158% increase, respectively, on the actual crop in 2015. That gives some indication of the company’s scale potential and management’s aspirations to grow its operations and consequently revenues and earnings. Clearly those earnings are in the future and a discount would be appropriate against any resulting future valuation.

■

The company’s expansion plans include acquisition of land as well as further development of existing land. We have not attempted to estimate the cost of such investment and to what extent it can be financed out of operating cash flows as well as the NAPCo proceeds mentioned above.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Real Estate

Regional REIT — Update 22 November 2016

Regional REIT

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