Investor's Chronicle 16/11/205 Dec 2020 10:12
Own production up 6 per cent year to date.
¦ Crude Palm Oil average price 26 per cent higher.
Anglo-Eastern Plantations (AEP:560p) has issued a bullish third-quarter trading update that points to a major profit recovery this year, the primary reason why I included the shares, at 570p, in my market beating 2020 Bargain Shares Portfolio.
Anglo’s primary activities are crop production and processing of crude palm oil (CPO) and some rubber from 16 plantations across Indonesia and Malaysia. The company has extensive landholdings amounting to 128,200 hectares, of which 72,696 hectares is planted. CPO, together with its related product, palm kernel oil, is derived from the fruit of the oil palm and is one of the four major vegetable oils. Non-food applications include use in bio-diesel and oleochemicals.
In recent years, a combination of oversupply and competitive pricing of other vegetable oils placed significant pressure on the CPO price (ex-Rotterdam). However, I anticipated a sharp rebound in 2020 based on specific drivers including: a reduction in supply coming onto the market due to a reduction of fertiliser applications by planters; lower prices keeping a lid on industry production growth; and Malaysia and Indonesia pushing through increases in their biofuel mandates.
The Covid-19 pandemic has certainly created unexpected price volatility, but the CPO price is certainly moving in the right direction, rebounding by 26 per cent to average US$665 per metric tonne (mt) in the first nine months of 2020 and surging by 20 per cent from US$710 to US$855 per mt since the start of October. The price only averaged US$565 per mt in 2019. Likely supply shortage resulting from the moderate La Nina weather phenomenon and the surge in the price of soyabean oil, a competing peer, are supportive of strong prices holding for the remaining part of the year.
So, with Anglo’s own production of fresh fruit bunches (FFB) up 6 per cent and total CPO production holding steady at 295,000 mt in the year to date, expect annual profits to obliterate last year’s result. Indeed, first half pre-tax profit of US$16.8m was only US$2.1m shy of the total profit reported for the whole of 2019, and Anglo is now benefiting from a very strong pricing tailwind in the fourth quarter.
There are no analyst forecasts in the market, but I would not be at all surprised to see full-year pre-tax profit double to US$38m to produce earnings per share (EPS) of around 60 cents (46p). Strip out Anglo’s net cash of US$90.2m (174p a share) and my financial models suggest the shares are currently being rated on a prospective cash adjusted price/earnings (PE) ratio of 8. They also trade on an unwarranted 41 per cent discount to book value of 950p. A return to February’s share price high of 680p, and the 2017 high of 886p, is not an unrealistic possibility. Buy.
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