Bid target MP Evans still massively undervalued

It's been five years or more since investors last showed any interest in plantation owners. In fact, their very existence on the London stockmarket would probably surprise most.

But the sleepy sector, running oil-palm estates in Southeast Asia, sprang to life six weeks ago following a hostile bid for our biggest player from one of the world's largest. It's given a fascinating insight into the industry and, subsequently, the potential upside for MP Evans.

Things got exciting for the Tunbridge Wells-based company on 25 October when Kuala Lumpur Kepong Berhad (KLK) launched a bid worth 640p a share in cash, or more than £350 million. That was a 48% premium to the previous day's closing price, and to the casual investor, looked generous.

Only 14 months earlier, shares in AIM-listed MPE, which runs oil-palm estates in Indonesia, had sunk to a five-year low at 340p. They hadn't traded above a fiver since 2013. But it was swiftly rejected by a board that knew the true value of the business. So was a second offer worth 740p.

Raymond Greaves, an analyst at finnCap, offers a quick explanation of events since: "MPE has issued a rebuttal, KLK has issued a rebuttal of MPE's rebuttal, and MPE has issued a rebuttal of KLK rebuttal of its rebuttal."

Clearly, KLK wants its man and hasn't walked away. But there's still a chasm between what KLK is prepared to pay and what MPE will accept for the business, set up in the 1870s by tea and later rubber broker Matthew Pennefather Evans.

Greaves said last month: "In our view, at current FX, a sensible value range for MP Evans would be 800p - 950p." Independent valuer Khong & Jaafar values the equity at £10.82 a share.

That certainly vindicates our decision 18 months ago to name MP Evans as one of Nine AIM shares to buy and keep forever.

And Evans has built a pretty solid defence against KLK, confirming last week it would increase the dividend both for 2016 and 2017 by 71% to at least 15p. Then, two days ago, bosses announced the sale of its 37% stake in Agro Muko to Belgian joint venture partner Sipef NV for $100 million (£79 million). Shareholders will receive a 10p a share special dividend.

"With the valuation genie now well out of the bottle, we have no hesitation in continuing to rate the shares a buy," wrote Greaves last month. Now, with the stake sale, dividends and other new information divulged through the bid process, he's revised numbers up again.

"As a result, we are increasing our price target from 815p/share to 835p/share," said Greaves Thursday, but admits that even these new assumptions on price per hectare could be "very conservative".

"The 740p/share bid effectively values the majority-owned plantation assets at US$12,250/hectare. The current share price of 655p effectively values the majority owned plantation assets at $10,000/ha. Quoted peers trade at a median level of $18,600/ha, clearly highlighting the value in the shares.

"KLK itself trades at more than $30,000/ha, but assets in Malaysia do tend to attract a material premium over those in Indonesia due to lower political risk.

"An upside case, valuing the plantation assets more in line with Indonesian peers would see the shares closer to 950p, based on today's US dollar rate. We feel that the KLK bid (or a competing bid) will need to be closer to these levels to have any hope of being successful."

A word of warning; while a strong case can be made for valuing the company at around 950p a share, whether KLK will pay it is another matter entirely. Without a rival offer and subsequent bidding war, one suspects some middle ground must be found.

If KLK is minded to, and doesn't throw in the towel, MP Evans shareholders, including Aberdeen Asset Management, might find an offer north of 800p a share impossible to refuse.

Clearly, the bid situation at MPE has been great news for London-listed peers REA Holdings (RE.) and £7 million Equatorial Palm Oil, too. Watch this space.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.