Investors seeking to profit from the global population’s inexorable need for nourishment should gobble up Indonesian palm oil-to-Australian beef cattle producer M.P. Evans (MPE:AIM). Despite lower selling prices in 2013 are positive. Moreover, the AIM counter is delivering sharply-increasing production in its core palm oil business, which combined with potential pricing improvements could drive earnings upgrades.

Tasty combination

Able to trace its origins back to 1870, the agribusiness’ assets span majority and minority-held palm oil plantations in Indonesia, beef cattle interests in Australia and residual Malaysian property assets in the midst of disposal. Its strategy is to expand its palm oil areas in Indonesia against a backdrop of strong demand for highly-competitive vegetable oil, used as a food and a feedstock for the biofuel industry, while looking to capitalise on the value of its Australian and Malaysian operations.

M.P. Evans’ Indonesian palm oil assets boast an attractive growth profile. Significantly, the company is well positioned to benefit from a sharp increase in fresh fruit bunch (FFB) crops, underpinned by the young age profile of plantations in new estates. One of the industry’s most immature palm oil businesses, a major part of M.P. Evans’ production growth is coming from new areas approaching prime production and set to generate rising crops for years to come. In recent months, palm oil pricing has been weak, but only in relative terms. Longer-term, demand from India and China is sure to build while rising consumption of palm oil for biodiesel in Indonesia and Malaysia should help to drive prices higher.

In its latest market missive (5 Jun), M.P. Evans flagged a good first five months of the year in both palm oil and cattle. Volumes of FFB in majority-owned estates grew by 16%, including 37% growth in the crop on new projects. Though an El Niño event might mean production growth targets are slightly missed, this weather phenomenon could also drive firmer prices as the year progresses.

Value opportunities

In addition to palm oil, M.P. Evans offers a play on burgeoning demand for red meat from China and other parts of Asia through its beef cattle operations. These assets are its southern Queensland-based beef cattle property Woodlands and a 34.4% stake in Aussie cattle company NAPCo. After a testing 2013, the new year has seen improvements for cattle, with significant rainfall improving the pastureland and aiding cattle weight gain. Rising demand from Asia, a lower US herd and a weak Australian dollar have also helped cattle prices higher, paving the way for improved results from the division.

While pressing on with productivity improvement measures, Woodlands will be sold in due course and M.P. Evans will also consider opportunities arising in relation to its NAPCo holding. Future sale proceeds from these and the Malaysian operations will be reinvested back into Indonesian palm oil expansion.

Peel Hunt analyst Charles Hall, with a 675p price target implying 46% upside, forecasts a surge in pre-tax profit from US$24.7 million to US$47.5 million (£27.7 million) for earnings of 64.4 cent (37.6p) this year. For 2015, the analyst looks for $57.5 million pre-tax profits and 74.5 cents of earnings.

M.P. EVANS (MPE:AIM) 462.75p BUY

Stop loss: 370.2p

Market value: £256.7 million

Prospective PE Dec 2014: 12.3

Prospective PE Dec 2015: 10.6

1-month relative strength: -3.9%

1-year relative strength: -15%

Prospective dividend yield: 1.1%

Bid/offer spread: 3.1%

Growth: HIGH

Strong sales and profit growth are forecast as a sharp uplift in palm oil production meets improving palm oil and cattle prices.

Risk: MEDIUM

Though the company faces weather and currency risk, the balance sheet and cash flow are strong and management team first rate.

Quality: MEDIUM

Palm oil production growth is highly visible, operating margins are rising and the business is both asset-backed and dividend-paying.