MPE Acquires New 10,000ha Block
Indonesian palm oil producer MP Evans (LON:MPE) has acquired a privately-held Singapore-based company whose local subsidiary holds 95% of a 10,000ha oil palm project in East Kalimantan.
• Of the 10,000ha land block, 8,240ha are company-owned estates with 1,300ha contained in a smallholder scheme and the balance being infrastructure and conservation areas
• Of the 8,240ha owned by the company, 7,400ha are planted with young oil palms (non-producing), 440ha are mature oil palms (producing) with a further 400ha in the process of being planted
• Total consideration is US$108m, with US$88m cash consideration and US$20m of assumed debt
• Significant growth is expected in the coming years as the trees mature along the yield curve. MPE expects the project to produce 270,000t+ of FFB per annum within ten years
• MPE plans to build a mill in due course as well as register the land with the Roundtable on Sustainable Palm Oil (RSPO), in line with its existing estates and mills
VSA Comment
Following the sale of the group’s 36.84% stake in Agro Muko in January, investors have been eagerly awaiting the deployment of the received funds into another palm oil project. Although it has taken longer than many expected, the transaction appears to be a good one, more than replacing the share of planted land lost through the Agro Muko disposal (7,200ha) for a price in-line with other recent transactions in the sector (cUS$13,100 per planted hectare).
However, it will take much longer for this project to replace the financial contribution lost as a result of the disposal of Agro Muko, given the early stage nature of the estate. The new project has just c5% of its palms currently producing, compared with Agro Muko that had c90% of mature oil palms. The new project made an operating loss of US$0.4m in 2016 compared to Agro Muko which contributed a share of profits to MPE of US$7.1m and gross dividends of US$3.7m in 2016.
With its ongoing share buy-back coming to an end (now 96% complete), the pressure was on for MPE to deploy its excess cash into an attractive transaction with strong growth prospects to support its share price. It appears to us that this deal fits the criteria. However, the end of the hands-off period for Kuala Lumpur Kepong (KLK LN) is now only four months away. We still expect it to return for a second try at acquiring MPE once this restricted period expires.