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VSA Capital Market Movers - MP Evans, Carr’s Group

Published: 08:09 26 Oct 2016 BST

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Kuala Lumpur Kepong Offer for MP Evans

Yesterday, Malaysian-listed £5.1bn market cap palm oil giant Kuala Lumpur Kepong (KLK MK) made public a bid it made for Indonesian palm oil business MP Evans (LON:MPE) on 11 October, which was rejected by the MPE board two days later.
Indicative offer at 640p, c50% premium to prior closing price, plus the scheduled interim dividend of 2.25p per share
The Board of MPE believes the offer is “wholly inadequate and very substantially undervalues the company, its unique positon and future growth potential”

VSA Comment

Another South East Asian producer has looked to take advantage of the persistent value gap between those producers listed in London and those listed in SE Asia (current EV/planted hectares (ha) median averages are: London-listed: cUS$8,000, Indonesia-based: cUS$10,500, Malaysia-based US$11,500).

It appears that selling the Australian cattle businesses (100%-owned Woodlands and the 34.37% stake in NAPCo) and becoming pure-play (with a significant net cash position) has made MPE vulnerable to a take-over.

We calculate KLK’s bid at cUS$12,000/planted ha. Although this is at a premium to the current trading median average in Indonesia, it looks low considering previously completed deals for London-listed palm oil producers, namely Sime Darby (SIME MK)’s US$24,422/planted ha acquisition of New Britain Palm Oil (LON:NBPO, now private) and Felda Global Ventures (FGV MK)’s US$21,098/planted ha acquisition of Asian Plantations (PALM LN, now private).

These deals were announced when the European benchmark CPO price was trading in the same US$700-750/t range as it is today. However, it should be noted that producers were trading on much higher EV/planted ha averages at that point, with many closer to US$15,000/planted ha. An offer at US$15,000/planted ha would correspond to a share price of 775p. Adding the value of MPE’s residual property interests onto this figure would deliver a further c65p, taking the acquisition price to c840p, c30% upside from the current bid value and at a level that we believe investors would be much more likely to accept.

Therefore we agree with the Board (which has already rejected the deal) that this offer undervalues the business. We would now look to see whether KLK increases its offer, or a counter-bid is made by another party. Perhaps the most logical would be JV partner SIPEF (SIP BB) coming in as a white knight, which would result in a combined CPO producer of significant scale remaining listed in Europe.

There is also the possibility that MPE might end up like Equatorial Palm Oil (PAL LN) (63%-owned by KLK), should less than 75% of MPE shareholders accept the offer but more than 50%, with the rump remaining listed (and even more illiquid).

We have already been asked a number of times whether this deal has any implications for fellow London-listed CPO producer REA Holdings (RE/ LN), which increased more than 20% off the back of the KLK bid being made public.

We believe the only exit for REA in the next few years would be its acquisition by Dharma Satya Nusantara (DSNG IJ), which entered into a financing deal with REA earlier this year and already owns 15% of REA’s main operating subsidiary in Indonesia. DSN has already announced its near-term intention to increase this stake to 49% over the next five years. Given the close relationship between the two firms, we believe it unlikely that both DSN (15%) and the Board of Directors (c30%) would look to sell their respective stakes to a third party, potentially blocking any hostile bid (MPE insider ownership is c9%).

In summary, the KLK bid might be opportunistic and not representative of fair value for MPE but the 50% premium to the last closing price certainly demonstrates to us the inherent value in London-listed palm oil stocks.

Carr’s Group Acquire STABER GmbH

Yesterday, Carr’s Group (LON:CARR), the agricultural and engineering group, has announced the acquisition of STABER GmbH for a total cash consideration of €7.85m (£6.98m), to be paid using funds received from the recent disposal of its flour milling division.
STABER is a German family-owned engineering business located near the Group’s existing German operations in Markdorf
STABER is a long term strategic partner of Walischmiller Engineering GmbH, a subsidiary of CARR, having developed multiple products together over the last fifty years
CARR will pay a cash consideration of €6.75m (£6.00m), adjusted for the estimated net cash with STABER
Last EBITDA was €0.67m, acquisition multiple 10.1x.
STABER will be fully integrated into Walischmiller over the next 18 months, with hope that the integration will provide growth opportunities across its remote handling division. €2m of the total consideration will be deferred until at the latest 31 June 2018.
VSA Comment

CARR’s acquisition of STABER highlights the group’s increasing focus on its engineering division, following the recent sale of its flour milling business. The acquisition is particularly aligned to the CARR’s strategy of capitalising on the global resurgence of the nuclear decommissioning sector. Although not a huge contributor in terms of EBITDA (FY 2015: €0.67m), STABER should be earnings enhancing in the CARR engineering division (FY 2015: EBITDA £4.2m) after the first year.

Although an acquisition multiple of 10.1x does seem slightly on the high side for such a business, there should be obvious operational and cost synergies between the two companies and STABER should be straightforward to integrate.

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