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SMALL CAP SHARE IDEAS: Dividend 'aristocrat' MP Evans Group

Palm oil: A short-lived ban on Indonesian exports has been lifted

It’s hard to pinpoint a reason for the seemingly lackluster performance of shares in sustainable palm oil producer MP Evans Group, which barely faltered following what, on the face of it, appeared to be a commendable package. intermediate numbers.

Neglected, underestimated, misunderstood? Perhaps the increase has already been factored into the price? Maybe. More likely, the UK investing public is simply unfamiliar with what MPE does.

It is easy to understand the fundamentals that underpin MPE and its financial performance. The impetus is given by the global demand for palm oil, a constituent of food products, cosmetics and biofuels.

Palm oil: A short-lived ban on Indonesian exports has been lifted

Palm oil: A short-lived ban on Indonesian exports has been lifted

The company is part of the 200 million tons per year and growing market for vegetable oils. Palm oil, with 71 million tonnes, is the largest component.

The mechanics of the market have been affected by the Russian invasion of Ukraine, Europe’s breadbasket and also the source of much of its sunflower oil.

This drove up demand for crude palm oil and with it prices, which averaged over $1,600 per ton (CIF Rotterdam spot price) in the first half of the year, up 45% on a year. Although things have cooled down a bit, the price, at around $1,000 per ton currently, is still well above the norm.

The only downside has been the rather unpredictable behavior of the Indonesian government, the world’s largest producer of palm oil and home to the company’s plantations and milling facilities.

A short-lived ban on exports has since been lifted and normal service has resumed.

MPE Managing Director Matthew Coulson views the episode as just that – an isolated incident that is unlikely to happen again.

“The export ban only lasted three to four weeks,” says Coulson. “This was strongly protested and would have hurt Indonesia, which receives significant tax revenue from this source.”

His 30 years of payout-increasing experience more than qualifies him for dividend aristocrat status.

“We’d like to think things have calmed down now.”

MPE is a company with a rich 150-year history that has fully embraced the modern imperative of being a sustainable business.

A member of the Roundtable on Sustainable Palm Oil (RSPO) since 2005, MPE has clear policies on “no deforestation and no burning”, practices that have previously given the industry a bad name.

“Being a responsible producer of certified sustainable palm oil is fundamental to us,” says Coulson.

“That means working closely with the RSPO. We’ve been a member for a very long time and continue to be – that’s why all of our estates are established, developed and compliant with RSPO standards.

Its strategy also has an important social dimension since it also offers quality housing and equipment to its workers.

In total, it employs 10,000 people in Indonesia and operates 52,800 hectares of planted oil palms, 40,000 of which are owned by the group, the rest being managed for smallholders.

By the end of the year, with the completion of the palm oil plant at the Musi Rawas operation in South Sumatra, it will have six crude palm oil processing plants ( CPO).

In the six months to June 30, its production was just under 161,000 tonnes of CPO – flat year-on-year. The driving factor for the MPE was the selling price obtained ex-factory, which jumped 43% year-over-year to $1,035 per ton.

This resulted in a 49% increase in operating profit to $61.7 million.

Cash generation over the past 12 months has been such that the company has written off net debt totaling $67.7 million to a net cash position of $13.5 million at month end. June.

Investors will be rewarded with a 25% increase in the interim dividend.

Going forward, MPE aims for sustainable growth by increasing its crop yield per hectare as its estates continue to mature. On top of that, he is considering acquisitions, especially opportunities where he can add value by improving returns.

And as Peel Hunt, the company’s corporate broker, pointed out, the group is only beginning to see the fruits (no pun intended) of its investment program in Indonesia.

The crop it processes has increased from 200,000 tonnes in 2010 to 1.4 million tonnes (mt) last year and is expected to reach 1.8 mt by 2025.

The ongoing investment saw the company’s net asset value (NAV) increase by 15% to 1,265 pa last year.

To put that into context, the shares, at 846p each, are currently trading at a 33% discount to net asset value.

The dividend yield, meanwhile, is around 5.6%, which, even on the current path of interest rates, is still higher than what you would get from your checking account.

His 30 years of experience increasing the payout more than qualifies him for dividend aristocrat status. To qualify as an aristocrat, a company must have paid and increased the dividend for 25 consecutive years.

In this context, some investors will wonder: where is the catch?

The savviest stock pickers know that the market is not always the perfect arbiter of value and that anomalies, like nuggets in a pot of gold, sometimes appear.

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