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A U.K. Value Pick: Anglo-Eastern Plantations

By Thomas CarrStock MarketsJun 07, 2022 21:21
A U.K. Value Pick: Anglo-Eastern Plantations
By Thomas Carr   |  Jun 07, 2022 21:21
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One UK stock that’s got my attention is Anglo-Eastern Plantations (LON:ANEA). The company produces palm oil, an edible oil used the world over, in everything from food manufacturing to biofuels. Anglo-Eastern is currently benefiting from a soaring crude palm oil (CPO) price, as reflected in 2021’s financial results.

2021 saw the group record revenues of £347 million, 64% ahead of the prior year (at constant currency). The strong performance also fed through to the bottom line, with after-tax profits more than doubling to £66 million.

Mill-processing efficiency aside, the improving profitability is almost all down to a runaway CPO price. Indeed, the average CPO price for 2021 was a huge 67% greater than the year before at $1,211/ mt. The 2021 price surge was explained by tightening supply, caused by labour shortages and Covid-19. The other side of the story was improved demand as global economies emerged from Covid -induced lockdowns.

A soaring crude palm oil price
The tragic events of 2022 have only served to exacerbate the CPO supply-demand dynamic. After starting the year at $1,320/mt, the CPO price is currently at around $1,680/mt, around 39% above last year’s average price. The Russian-Ukrainian conflict has severely disrupted the production of other vegetable oils, with Russia and Ukraine jointly accounting for more than half of the worldwide supply of sunflower oil. The result has been clear: improved demand for Palm Oil and an increase in the CPO price.
CPO Price Chart (Weekly)
CPO Price Chart (Weekly)
The other thing that’s clear is that this is going to be a bonanza for Anglo-Eastern Plantations. At the current CPO price, after-tax profits for 2022 could come in at over £100 million. And that’s even allowing for a slackening in production. After all, last year’s profit figures included a loss of £22 million from discontinued operations, which are set to be sold this year. All else being equal, this should improve the bottom line.
The shares currently trade at five times last year’s earnings. This time next year, that figure could be even lower. But we should note that profitability will likely be cyclical, as it’s dependent on the CPO price.

Strong fundamentals
In my opinion, what’s most attractive about this stock, isn’t the P/E ratio, or the surging CPO price. Instead, it’s the group’s balance sheet and market capitalisation. Anglo-Eastern currently has a market capitalisation of £353 million, which represents a discount of 19% to its net assets. What’s more, there is zero external debt and a whopping £174 million in cash.

With the group generating over £100 million in cash flows last year, there is every indication that 2022 will see a similar result. By the end of the year, it’s possible that there will be near to £300 million in cash just sat on the balance sheet, and an increased net asset value to boot. Whilst it’s only prudent to retain some of this cash for darker times, it’s also logical that some of this will be returned to shareholders, either in the form of dividends or a share buyback. Either way, shareholders should benefit.

What's the catch?
Sounds too good to be true? Well, there is a catch. Palm Oil is generally regarded to be environmentally unfriendly, due to its association with deforestation, emission of greenhouse gases, planting on peatland, and worker rights issues. Not only does this pose a moral issue, but it also raises an economic one. The EU has already signalled its intention to completely stop the use of palm oil in biofuel by 2030, and there is a general unease amongst wider society.

On top of that, the plantation asset values are largely based on value-in-use calculations. They are based on the expected future cash flows that they can generate for the company. This means that in the event of needing to sell assets, the realisable values may be lower, and the discount to net asset value could be narrower. But as long as the plantations remain profitable, the valuations should remain intact.

In spite of all these negatives, there is still a strong investment narrative. Palm Oil production is much more economically sustainable in terms of its land use, than other alternatives. Despite growing concerns, there is reason to believe that there will still be demand for the foreseeable future.

The group is doing its best to tackle environmental concerns. Biogas plants are being built at all its mills – designed to trap toxic methane emissions that contribute to global warming. The biogas plants also produce electricity, which is sold off to reduce the group’s carbon footprint. The group also says it’s committed to ethical sourcing and deforestation principles.

Taking everything into account, despite the risks, there is a compelling investment case. The attraction comes mostly from the balance sheet, with a discount to net asset value that I think provides insurance against risks.

Disclaimer: Thomas owns shares in Anglo-Eastern Plantations
A U.K. Value Pick: Anglo-Eastern Plantations

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A U.K. Value Pick: Anglo-Eastern Plantations

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