Offer for M.P. Evans & new position in a palm oil company

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.

On November 15, KLK increased it’s bid to 740 pence. This offer was also rejected, this time with support of shareholders collectively holding 41% of the outstanding shares.

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

Posted in European Stocks.

4 Comments

  1. Two unrelated comments :
    -good luck with the premium model even though the best way to monetize your work in my opinion is to get hired by a large fund on the basis of this public track record.
    -there was another interesting transactions in plantations recently, with Michelin making an offer for SIPH. Here too the share price had been languishing for a few years.

    • Thanks for the comment, Bobby.

      – I’m not interested in building up a public track record for career purposes. I don’t want to go into money management. I wouldn’t want to deal with clients who freak out when I buy a few Greek stocks, for example. Also, I’m probably not math savvy and intelligent enough to pass the CFA exams, which is something most funds seek. Even if I was, I wouldn’t want to spend many hours learning efficient market nonsense. I’m happy investing for my own account and being my only client.

      – Thanks, I’ll take a look at that. There seem to have been a number of interesting transactions in the last couple of years.

  2. Will you be posting all your new buys in the premium content? Sells as well? Will we be able to follow your portfolio? thanks.

    • I will not be posting all my buys and sells and reporting them in real-time. That might give some people the idea that it is good idea to “clone” those ideas or whatever. I think cloning is a very dangerous concept and I don’t want to cater to investors who like that concept. The way I’d like people to view the premium write-ups is to consider them investment ideas. It is an opinion from an investor about a company. The stocks that are discussed require your own research and analysis.

      I do plan to lock access to former portfolio positions that I’ve since sold, but there might be some delay.

      Another issue is that sometimes I find some pretty speculative stocks that I end up buying. Last year I invested in a dark company on the pink sheets that appeared to be trading at ~5x earnings. The problem was that I had very limited financial information and didn’t even know for sure how many shares were outstanding. I ended up buying a position anyway. That stock has more than doubled since. I’m hesitant to write-up a company like that, because too many pieces of the puzzle are missing to produce a solid write-up.

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