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Questor: palm oil is a commodity but these firms are best placed to ride out the ups and downs
Questor share tip: MP Evans and United Plantations are long-established family businesses, both with efficient operations and strong balance sheets to boot
Today we offer readers two for the price of one: we are tipping a pair of stocks because they are very similar businesses and both found in portfolios run by one of Britain’s most experienced and respected investors.
The stocks are MP Evans and United Plantations, two producers of palm oil in the Far East. MP Evans is quoted on London’s Aim market, while United Plantations’ parent company is listed in Copenhagen.
Both own extensive plantations in countries such as Malaysia and Indonesia, and harvest the fruit from palm trees to produce palm oil in their own refineries, which are situated locally. Palm oil is similar to other vegetable oils such as that from soya but offers the highest yields of any type of refined vegetable oil per acre of land.
It is used extensively in foodstuffs such as margarine, chocolate and ice cream.
“Both MP Evans and United Plantations are long-established family businesses, whose founding families retain large stakes,” said Hugh Young of Aberdeen Standard Investments, arguably Britain’s most experienced emerging-markets investor.
“The generation in charge now are traditional, straight people who are trying to run the companies in the best way possible.”
He said the firms were the two most efficient producers of palm oil in the world. This is particularly important because the oil is a commodity – its price is determined purely by supply and demand – and there will inevitably be times when prices are low.
At such times, survival is ensured by being among the lowest-cost producers and by having a strong balance sheet, something else the companies have in common. “Across the cycle it’s a profitable business to be in but you have to be efficient in order to survive the bad times and be able to enjoy the good,” Young said.
“It can be a bumpy ride for investors, as you would expect with any commodity.”
The current palm oil price of roughly $500 a ton is about the breakeven point for the two companies and represents a recovery from recent lows of about $450. It was closer to $700 at times in 2017.
Young acknowledged that palm oil production was controversial but said both companies were members of the Roundtable on Sustainable Palm Oil and maintained high environmental standards. “They are not clearing new land, although that is not enough for some campaigners. We think the firms are carrying out their business in the best possible way.”
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The veteran fund manager said MP Evans’s plantations were valued at $600m in the most recent accounts, those for 2017, considerably more than the current market value of about £360m. This is despite the fact that the company has been the subject of takeover interest from a large Malaysian rival, which has benefited the share price.
Young said United’s assets were similarly undervalued, although shareholders were unlikely to see the extra value realised by means of a takeover because the founding family had a controlling stake.
Both have strong records of dividend increases in recent years.
Readers who want to buy into United Plantations should purchase shares in Copenhagen-listed United International Enterprises.
Questor says: buy
Tickers: MPE, CPH:UIE
Share prices at close: 656p, Dkr1,345
Update: Clarkson
Shares in Clarkson, the shipping broker, have been volatile since we tipped them at £19.75 in October 2016: they have been as high as £34.50 and as low as £19. We are now in the black with the shares at £23.50.
The company issued a profits warning in April last year but said recently that its full-year profits for 2018 should be in line with market expectations.
Montanaro Asset Management, on whose backing for the stock we based our tip, said this announcement meant the company had seen “a strong recovery in the second half”. Gaspar Ariño, an analyst at the asset manager, said: “This is consistent with my view that there is a better balance between supply and demand, which is reflected in higher freight rates.”
Questor says: hold
Tickers: CKN
Share prices at close: £23.50
- Questor archive: telegraph.co.uk/questor