Investors seeking a strong profit and dividend growth story with M&A optionality thrown in should cultivate a position in Indonesian palm oil producer M.P. Evans (MPE:AIM). Boasting one of the industry’s youngest estates, MPE has superb earnings visibility for the coming decade, while the strategic attractions of its assets could stir renewed bid interest before too long.

Cultivating value

The £410.4m cap is a play on a global palm oil market with encouraging fundamentals. Vegetable oil is a basic foodstuff seeing increasing demand from a growing world population. Delivering by far the highest yield per hectare of all the vegetable oils, palm oil also has the lowest cost of production.

M.P. Evans’ half year results (18 Sep) revealed operating profit more than tripling to $18m as crops surged and palm oil prices strengthened; the company also harvested a one-off $68m profit following January’s sale of its Agro Muko plantation joint venture, as per management’s strategy to focus on majority-held plantation operations.

Immature estates

Excitingly, M.P. Evans is investing $108m in a 10,000 hectare plantation in East Kalimantan with a further $30m to be spent over the next five years on a mill and infrastructure. Earliest plantings from the project, more than replacing the Agro Muko hectarage sold, are already being harvested, meaning the acquisition will immediately contribute to crops, production and cash inflows.

The acquisition leaves M.P. Evans with one of the most immature estates in the industry, meaning its volumes and sales should be on an upwards trajectory for years to come. Estates become more profitable and cash generative as they reach maturity, while new palms are more productive with a higher oil yield due to improved genetics.

Peel Hunt has a ‘buy’ rating and an 880p price target implying 18% upside over the next 12 months. For the year to December 2017, the broker’s upgraded forecasts point to a leap in adjusted pre-tax profit to $33.6m (2016: $24m), rising sharply to $46.7m and $55.1m in 2018 and 2019 respectively. A total dividend of at least 25p per share is expected this year, while M.P. Evans’ share buyback budget has been extended by £2.5m to £7.5m.

Shares believes the valuation of M.P. Evans’ plantations will only increase as scarcity of new land encourages further industry consolidation. At 745p, the shares are modestly ahead of the 740p offer made by hostile suitor KLK last year, one rejected by shareholders. KLK subsequently acquired a 12% stake and cannot make an offer without the board’s approval before December.

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