AEP.L - Anglo-Eastern Plantations PLC

[farbelow]

Skanjete has brought up the palm oil industry and AEP in this thread from last year where he lays out the case in an excellent way:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/palmoil

 

Thank you for another interesting idea, Skanjete! (and for GDWN and for TESB)

 

AEP's share price has not moved up since last year and the catalyst (see below) is more imminent, so I believe the idea is as current now as it was last year. I believe this idea deserves to be dusted off and have it's own thread in investment ideas. I briefly summarize the case below. For the whole story I highly recommend reading Skanjete's thread.

 

VALUATION

In 2014 AEP had an ebit of 78.8M USD (note that financial statements are in USD and share price in GBP) before biological asset adjustment (so before valuation of trees, the age of trees and current palm oil price CPO). In the last 6 years EBIT has been between 98.5M on the high side and 59M on the low side. So, 78.8M is not a crazy EBIT to look at.

The market cap is 250M GBP = 395M USD. They have 35M debt and 126M cash. This makes an EV of 304M, ie EV/EBIT is less than 4. And this for a company that in the last 6 years has:

1. Continuously been profitable

2. Grown revenue since 2009 with a cagr of over 10%

3. A roic of between 19% and 36% in the last 6 years.

 

COUNTER CYCLICAL CAPITAL EXPENDITURE

AEP has invested in new trees in 2009 and 2010, right when all other plantations were cutting down on investments. Palm trees take 4 years before they produce fruit and then another 4 years before they produce 100%. So, the effect of lower capital expenditure of other plantations will now starting to show up in less production. And AEP, which currently has over 40% of their trees young or immature, will see a large increase in production in the coming years.

 

ENVIRONMENT

I do not want to make money by doing evil. Some environmentalists make us believe that palm oil is environmentally destructive. However, palmoil seems to be the most green vegetable oil available. For the same amount of palmoil you need 10 times as much land to deforest for soy oil than for palm oil. And there seem to be alterior motives for f.e. the French: they prefer to subsidize their rapeseed farmers instead of buying palmoil. For the latest spat on this issue, see Segolene Royal's urge not to eat Nutella and subsequent apologies: http://www.theguardian.com/world/2015/jun/17/nutella-italian-minister-demands-apology-from-segolene-royal

 

Also there is a movement, RSPO, to produce green and ethical palmoil, which is currently being introduced also by AEP.

 

RISKS

 

1. CPO price: this price is currently depressed. Reasons are over expansion and low Brentt oil price (low demand for bio fuel). There seems to be little room for CPO to go further down and AEP is still profitable.

 

2. RSPO certification: RSPO certification will be required in Indonesia where AEP has 95% of their plantations by the middle of 2016. AEP is, let's say, not ahead of the pack in introducing RSPO. This is currently a competitive advantage (lower production cost), but AEP will have to comply at some point. By that time AEP should also be able to charge higher prices for their palmoil. However, in general, the price gap between palmoil and soyoil will compress and this may effect demand for palmoil.

 

3. Indonesian government: Indonesia is not a stable country, different wage increases per province, unclear regulation (100 k ha per country or per province? 20 k ha per province?), land ownership disputes, rights on lands expiring. However, palmoil is very important to Indonesia and the government knows this.

 

4. Shareholder friendliness: over 50% is owned by Madam Lim Siew Kim who is 65 and has owned it for the last 20/30 years. She is not interested in dividends, share repurchases or sale of the company. This may explain the low multiple. However, if the fundamentals improve, than the share price has to move even with a low multiple.

 

Skanjete, did I get the essentials right?

 

[misterkrusty]

I tried calling IR not too long ago to ask them if they are RSPO compliant.  never returned my call

 

can you quantify how much RSPO will raise their production costs?

[skanjete]

Thank you Farbelow for your resume and your kind words.

 

Maybe some first-thought additions :

- the palmoil industry has a durable competitive advantage within the vegetable oil sector. The reasons why are explained in the former thread. Within the palmoil industry, AEP is one of the star performers in terms of efficiency, ROE and margins.

- As explained by Farbelow, the AEP share price is very cheap (as it has been for years). An other way to look at the valuation is the valuation of the palm oil plantations they have. Enterprise value divided by their planted hectares gives a valuation of about 4.500US$/ha. Similar hectares however are easily valued at above 18.000$/ha in private transactions nowadays, even with these depressed CPO prices. (cf. the NBPOL transaction from a few months ago)

- A possible explanation for the low share valuation could be 1) no PR activity or interest, 2) majority shareholding by the family and 3) listing in London. I'm sure valuation would be at least 3x as high if they listed in Kuala Lumpur or Jakarta.

- In light of this last remark, I refer to an old acquantance of AEP : REA (AEP was spun off from REA in the late '80s I think). REA is also a CPO plantation listed in London and is currently evaluating a listing of a subsidiary (REA Kaltim) in Jakarta. As one of the reasons for the move, they mention the political evolution in Indonesia to a more protectionist stance in the CPO

industry. Now, I note that AEP mentioned the same evolution in one of their last reports. If (this is a supposition of course) AEP would consider a similar move to an eastern stock exchange, that could be a major calalyst. I know they considered it a few years ago, but they then didn't proceed with the plans. Maybe the changed political climate could be an incentive for them to do it this time.

[farbelow]

I tried calling IR not too long ago to ask them if they are RSPO compliant.  never returned my call

 

can you quantify how much RSPO will raise their production costs?

 

I cannot quantify how much, if any, RSPO certification increases their production cost. However, the text below from AEP's annual report, leads me to conclude:

1. It is actually ISPO (Indonesian version, which is fundamentally aligned with RSPO) and not RSPO that is required by middle of 2015. My mistake.

2. Apart from expenses for the process of certification, the measures have been taken (and costs incurred)

3. AEP seems to have all their subsidiaries ready for ISPO certification (i.e. production costs are already for ISPO certified palm oil, just not all subsidiaries are certified). And the bottleneck is just the availability of certification auditors.

 

Quote from annual report 2014:

The Group has registered all its Indonesian operating subsidiaries for the ISPO certification. In January 2014, three subsidiaries were ISPO certified while another is awaiting certification approval after completion of all requirement. Seven subsidiaries are at various stages of certification audit. It was reported in October 2014 that of the 880 companies applying for ISPO certification, only 63 companies have so far been certified due mainly to a shortage of certification auditors. The Chairman of ISPO announced in December 2014 that the deadline for registration of all palm oil companies for ISPO certification has been extended by another 18 months. The ISPO certification of the Group estates and mills will continue in 2015.