On October 25, 2016 Kuala Lumpur Kepong Berhad (KLSE:KLK), a Malaysian plantation company, made an offer of 640 pence for U.K. listed M.P. Evans Group PLC (LON:MPE), which is also in the oil palm and rubber plantation business.
The original offer represented a premium of 51% of the trading price at that time. The board of MPE rejected the offer a couple of days later, but the most interesting part of that announcement was that the management of MPE had the support of shareholders who were representing almost 55% of the shares outstanding. The list of those shareholders rejecting the offer was mostly made up of various investment funds and pension funds.
I’ve been following this story with some interest, because M.P. Evans’ shares were languishing around the 400p level since 2011. Now a large company (KLK has a market cap of almost £5bn) comes along that offers a substantial premium and most shareholders are still not interested in selling. Also, an independent valuation report and a response document were made available that values M.P. Evans at 1,082 pence per share. The valuation report contains some useful information about how to think about the valuation of plantations and some data about comparable transactions:
The KLK Offer implies a value per planted hectare of only US$9,700, compared to the Independent Valuer’s view of US$17,300 per planted hectare and comparable transactions in a range of US$15,000-20,000 per planted hectare.
(bold text mine)
KLK only managed to get ~13% of the shares in the offer, but they have been buying in the open market since then. M.P. Evans has responded by initiating a share buyback, monetizing some of its assets and increasing its dividend. Shares are currently trading below the final offer price by KLK of 740p, so I think M.P. Evans might be a decent bet for investors.
All this provides an indication that there might be value to be found among publicly listed plantation companies. Large, international plantation companies are apparently interested in making a deal for smaller listed plantation companies and a number of (presumably knowledgeable) investors just rejected such a bid, despite being offered a substantial premium. Meanwhile, Indonesia – with Malaysia by far the two largest producers and exporters of palm oil in the world – has proposed a five year moratorium on new palm oil plantations, which could make existing Indonesian plantations more valuable and which could lead to consolidation in the industry. The demand for palm oil has steadily increased over the last decade or so, driven by population growth in Asia and India and it looks like this trend will continue.
I came across one palm oil company recently that looks very cheap to me. I’ve written a post about this company that is available on VIB Premium now.
This company is trading at a fraction of the implied planted area values as presented in the valuation report and even at a fraction of the value implied in the KLK offer. It’s also trading at a large discount to another comparable transaction that took place last year. The company looks pretty cheap from an earnings and cash flow perspective as well.
I’m far from an expert on palm oil plantations, but I do believe this company is trading at a very depressed price for a number of reasons and that it should offer a solid margin of safety at current prices.
I’ve also added a new package of 50 credits as a third option for accessing write-ups on VIB Premium. A smaller package option was requested by a number of readers who are mainly interested in viewing ideas for one or two markets.
Disclosure: no position in M.P. Evans or Kuala Lumpur Kepong Berhad, long Company 4