Added quite a bit to this and think it’s a better opportunity now than it has been for quite a while due to catalysts which appear round the corner.
As of writing its a c5% weight.
Brief summary, Anglo Eastern Plantations is a family holding company involved in palm oil plantations which has had a generational change of management, hopefully leading to a change in strategy. Lim Siew Kim held 51% and died on 14th July 2022. She was the daughter of the patriarch of the large Malaysian Genting group (mostly hotels).
The market cap is around £337m whilst it has c£223m in cash / short term investments. There is c£200m in plant and cash (post capex including growth capex) generated worth c£69.5m – or c20% of the market cap, or to put it another way c60% of the ex-cash market cap. This is based on strong palm oil prices, which are roughly double potential lows on the 25 year chart… They also process bought in palm oil and have rubber plantations.
It’s difficult to work out what this is actually worth. If you look at value per hectare MP Evans said an independent valuation put it at c$15’000-$20’700 / hectare. AEP has about 90’000 hectares (less in reality as not all can be used / planted), it also has planted 67’000 hectares (report P5). Putting it together gives a high value of $1.4bn / £1.1m – so roughly c3x the current price. I have my doubts as to this valuation – as it would mean that (based on last years profit, from a year with high palm oil prices – we would be trading at 10 PE (ignoring the cash) – seems a little high… (similar multiples vs FCF). To put this in context, Indonesian interest rates are 5.75%. In terms of comparators 1961.KL trades at a PE of 24 but are a far larger player. Genting Plantations (GENP:KLS) is on a PE of 11 (with some debt), then again Sarawak Oil Palms (SOP:KLS) is on a PE of 4.5, again with some debt. Even if we value earnings at 4.5x we get to £312m plus 223m cash plus something for the plant I presume (£100m) – so almost double current market cap… Ultimately, to me, it is hard to justify the current valuation.
Of course there are many companies trading below what they are worth, particularly based in Asia with a dominant, family shareholder. The company has acted pretty much as an effectively dead holding company for years, accumulating cash, paying a minimal dividend and growing it’s own book value per share. In it’s defence a few years ago many of it’s trees were young / immature and over the years they have gradually increased their planted area – from 57’100 hectares in 2012 to 75’204 hectares in 2021 (P53). As oil palm trees take 6 years to become maximally productive we can expect some ongoing growth in production.
I believe the change in management will lead to a change in how the company operates to a more shareholder-friendly model. In their latest announcement they said they would consider buying back shares.
The Board has also been receiving increasing requests from shareholders to buy back AEP’s shares with the cash balance. The Board has in the past been reticent on share buy backs because of the lack of evidence that a buy back directly results in an increased share price, especially with the lack of liquidity of the Company’s share and buy backs could cause the shares to be more illiquid. Nevertheless, the Board has taken on board shareholders’ sentiments and will consider launching a modest buy back programme in a timely manner and at a efficient price. Further details will be communicated to shareholders in due course. The last time AEP bought back its shares was in 2007 with a purchase of 50,000 shares at £3.86 per share.
The dividend has also quadrupled to 25c per share (0.20 GBP) – giving a yield of c2.3%. There has also been a director buy of £126k, from what I can see the first transaction in many, many years, prior to the dividend / buyback announcement. This is particularly significant as the exec buying shares gets paid $87k/£70k per year by the company. It is a little tricky for them to buyback shares as the major shareholder is already at 51% and their shares are rather illiquid.
One of the things I like is that the whole board only gets paid a few hundred k. I am very very sick of managements being ridiculously paid, whilst taking zero risk and adding very little. It shows the advantage of a strong, controlling shareholder – in preventing snouts going in the trough. Having said that corruption is a problem in Indonesia and in the palm oil sector more generally, though I have no evidence / specific suspicion Anglo Eastern is involved.
I generally avoid companies with such a dominant controlling shareholder but will tolerate it in this instance, I generally prefer a balance of power amongst shareholders, I will watch for related party transactions / other shenanigans.
My hope for this is that there will be more shareholder friendly actions – it doesn’t make sense to run this as a perpetual cash accumulation machine, eventually it either needs to acquire / pay out cash / both. I am quite happy that they keep a store of cash, even that they keep a substantial cash balance – I am aware it’s inefficient, from a strict perspective – but the problem with using credit is you are always at the mercy of your creditors – and when you need money no-one wants to lend. This is particularly a concern in agriculture which is subject to disease / climate as well as potentially volatile pricing. Having said this, the cash is 3 years worth total expenses (excluding palm’s bought in for processing – very much a pass through / margin earning business). This is a ridiculous amount by any measure. I believe a substantial amount can be returned to shareholders.
The worst case scenario for me is that nothing happens, in this event I’d suggest a likely price would be in the 600p-900p range. If the company is run in a more rational, shareholder friendly way its a likely double or more, but at relatively low risk, I’d hope it will happen in a year or two. Some possibility of a buyout/ trade sale if the controlling shareholder wants it.
This should come with a health warning that many of my ideas haven’t worked particularly well of late. I am actually only down c4-6% ytd (S&P+10%, FTSE+5%) though it feels like I am down far more. When things have worked out for me – PTAL / KIST rises are very limited and not sustained, when events have gone against me falls are excesssive and sustained (GKP / JSE). One way to play this could be short term trading – getting the 20% spikes where possible and quickly getting out at the first sign of trouble. However, the commodity producing shares I am investing in of late are trading at (often low) single digit PE’s with strong balance sheets (generally) so I think they will rerate substantially in time, potentially very rapidly. I am not convinced trading is the way to go long term, hopefully this view will pay off in the longer term. The market really doesnt like commodity producers, pretty much at any valuation, particularly non-ESG compliant ones.
As ever, views appreciated.
