UK value stocks #1

M.P. Evans Group (LSE: MPE) is a producer of sustainable crude palm oil from plantations in Indonesia. Its well invested estates and strategy of steady expansion underpin its commitment to pay attractive returns to investors through increasing dividends.

This £346m-cap FTSE AIM 50 stock trades at a discount to Asian peers. A few years ago, shareholders resoundingly rejected a 740p-a-share offer from one such peer on the grounds it substantially undervalued the business. The latest independent valuation of its assets gives the group an equity value of 1,001p per share.

The share price is 635p, as I’m writing. This is a 14% discount to the rejected offer and a 37% discount to the independent valuation. With the prospect of steady asset expansion, rising profits and increasing dividends, MPE’s shares look very buyable to my eye.

UK value stocks #2

Another business I’d be happy to buy a slice of is Ocean Wilsons Holdings (LSE: OCN). This one is listed on the FTSE main market, and has a capitalisation of £241.4m.

OCN has a controlling 58.16% interest in Sao Paolo-listed Wilson Sons — one of the largest providers of maritime services (towage, container terminals and so on) in Brazil. OCN also has a portfolio of around 80 international fund investments (e.g. Findlay Park American and Adelphi European Select Equity).

Based on Wilson Sons’ latest share price, and current exchange rates, OCN’s interest in the business can be valued at £243.4m. This is equivalent to 688p per OCN share. Meanwhile, the value of its investment portfolio last reported (31 October) was £211m, or 597p per OCN share.

Therefore, the sum of 688p and 597p gives OCN shares an intrinsic value of 1,285p. Yet they’re trading at 682.5p — an implied discount of 47%. Put another way, OCN shares buy you Wilson Sons at a small discount to its price on the Sao Paolo stock exchange and you get the £211m investment portfolio thrown in for free. My calculations suggest OCN is another top value stock on the UK market.

A cornucopia of cheap assets

Finally, I’d also be happy to buy FTSE 250-listed AVI Global Trust (LSE: AGT). It scours the globe for opportunities — typically holding companies and closed-end funds — where the price is at a significant discount to the estimated underlying net asset value (NAV).

For example, its top 10 holdings at its last year-end (30 September) included Pershing Square (estimated discount 30%), Softbank (56%) and Prosus (34%).

And AVI Global’s holdings each own, or have an interest in, a number of assets. For example, you’ll find coffeehouse chain Starbucks, and Chinese technology giants Alibaba and Tencent in the portfolios of Pershing, Softbank and Prosus respectively.

In addition to the discounts to NAV of its holdings, AVI Global is trading at a discount. Its share price of 794p is just over 10% below its last reported NAV of 883p (at market close on Thursday). As such, it’s another great UK value stock in my book.

The first is FTSE 100 private healthcare group NMC Health (LSE: NMC). It’s the leading operator in the Gulf Cooperation Council region, whose member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The second is MP Evans (LSE: MPE), a well-established producer of palm oil in Indonesia.

Price pain but profitable

In its annual results, released today, MP Evans reported a 32% increase in crops to 573,000 tonnes, and record production of crude palm oil — up 25% to 192,500 tonnes. Meanwhile, costs were down by 14% to $320 per tonne of palm product.

However, one thing outside the company’s control is the price of palm oil. Record production and reduced costs could not outweigh a year of significantly lower palm-oil prices in 2018. The company remained profitable, but profit from continuing operations fell to $7.2m from $27m in 2017.

The share price was down as much as 10% to 620p in early trading, but has recovered to 652p (down 5%), as I’m writing. This represents a whopping 86 times today’s reported earnings per share (EPS) of 9.9 cents (7.6p at current exchange rates). However, the outlook for 2019 and beyond is much brighter. And this gave the board confidence to maintain the 2018 dividend at 17.75p (running yield 2.7%).

Rising earnings ahead

The palm oil price has recovered from a low point of $440 per tonne in the middle of November to $520 per tonne at the end of March, and the futures market is anticipating significant further price increases to come.

Ahead of today’s results, forecast EPS for 2019 stood at 42 cents (32p), rising to 54 cents (41p) for 2020. So on a forward basis, we’re looking at 20.4 times EPS, falling to 15.9 times. This is a well-managed business, with many years of increasing production ahead, and I rate the stock a ‘buy’ at the current price.

Multi-year growth story

There was no annus horribilis for NMC Health in 2018. The company delivered another year of record revenues and profits. EPS growth to 133 cents (102p) was in line with its four-year annual average of around 30%. Strong growth is set to continue, with EPS of 177 cents (135p) forecast for 2019, followed by 219 cents (167p) for 2020.

A current share price of 2,420p represents 17.9 times forecast 2019 EPS and 14.5 times 2020’s. Meanwhile, a running yield of 0.75% on a dividend of 18.1p is set rise strongly in the coming years, with the payout tracking the rapid growth in EPS.

NMC is another well-run business, and management has a record of under-promising and over-delivering on guidance. The company’s unmatched geographic reach within its target markets, and significant lead over others in the diversity and complexity of its medical services, are strong competitive advantages. I see another multi-year growth story here, and another stock I’d be happy to buy today.

Underlying progress

On the face of it, today’s first-half numbers were underwhelming. Revenue from continuing operations was down 6.5% to $53.8m, and operating profit dropped 39% to $10.7m. However, this was due to external factors. Revenue was hurt by a 10% fall in the commodity price of crude palm oil (to $663 per tonne from $735), while the decline in profit mostly reflected a $4.1m unrealised exchange rate loss, as the Indonesian rupiah weakened against the US dollar.

Fluctuations in the palm oil price and currency swings can boost, or hold back, the company’s performance from year to year. However, the underlying progress of the business is the important thing and this continues to be strong. Crops were 27% higher than in the same period last year, with the group increasing its hectarage, and its young plantings maturing. Meanwhile, production costs were reduced by 8% to $350 per tonne, from $380. As an efficient low-cost operator, MP Evans is well-positioned to remain profitable through periods of soft prices (as at present) and to make bumper returns when prices are firm.

Further upside for investors

In late 2016, the company’s shares were trading at around 425p but soared on a 640p offer from £5bn Malaysian conglomerate Kuala Lumpur Kepong Berhad (KLK). This, and a subsequently improved offer of 740p, were rejected by the board and major shareholders on their view that it “very substantially” undervalued the company.

The shares are trading at 768p, as I’m writing (up 1.6% on today’s results), and the company’s market capitalisation is £420m. I continue to rate the stock a ‘buy’, as there are three reasons why I believe there’s further upside for investors. First, the company has made good progress on its growth strategy since the 2016 KLK offer. Second, based on an independent market valuation per planted hectare, the directors estimated group equity value at the last financial year-end of 1,096p a share. And third, KLK hasn’t walked off into the sunset and is still very much on the scene.

Value will out

Very soon after being knocked back by MP Evans’ board and shareholders, KLK began acquiring shares in the company. It crossed the disclosable thresholds of 3% and 10% in January 2017 and has continued to increase its stake. The last notification was as recently as 16 August when it crossed the 15% threshold. KLK clearly sees value in the stock at the current level.

Now, the Malaysian conglomerate may be content to participate in the upside potential of MP Evans as a minority shareholder. Or it may be brewing up for another offer, which would surely have to be at a decent premium to the current share price to win shareholders over. Either way, I believe sooner or later the intrinsic value of MP Evans will be reflected in its share price. In the meantime, a 2.3% dividend yield is not to be sniffed at while waiting.

The company in question released its annual results this morning. It reported a record year of production and profit, with operating profit increasing 72%. The shares are trading modestly higher but I reckon the valuation remains compelling.

A different kind of oil company

MP Evans(LSE: MPE) is a producer of palm oil through the ownership, management and development of sustainable oil-palm estates in Indonesia. It also manages and develops smallholder areas attached to some of the estates.

The company reported a 9% increase in group crops for 2017 and a 23% increase in palm oil production. Revenue from continuing operations increased 39% to $116.5m and fed down to an 83% rise in earnings per share (EPS) to $0.407 (28.7p at current exchange rates), compared with City expectations of $0.31 when I last wrote about the company in November.

Highly attractive valuation

At a current share price of 760p, the trailing price-to-earnings (P/E) ratio is 26.5. Analysts are forecasting a 39% increase in EPS for 2018, which brings the forward P/E down to 19 and gives a highly attractive price-to-earnings growth (PEG) ratio of 0.5. Furthermore, earnings are forecast to continue powering higher beyond this year. This is because the group’s plantings are relatively immature, “underpinning an upward trend in crop that is expected to last until the end of the next decade.”

The future looks bright, with the company’s strong balance sheet also enabling it to invest in further acreage, as well as paying dividends. Ordinary dividends totalling 17.75p for 2017 (up 18% on the prior year) give a running yield of 2.3% and payouts look set to continue rising strongly in the coming years.

Finally, turning from earnings and dividends to assets, I find a similarly attractive picture. Based on an independent valuation of the group’s properties, the directors estimate a group equity value of 1,096p a share, putting the shares at a discount of over 30%.

Long growth runway

Online fast fashion retailer Boohoo has fallen out of fashion with investors. I put the hefty decline in its share price down to three things: general market weakness, concerns about UK consumer spending and, probably most importantly, a less scintillating profit outlook than the market was previously anticipating.

We’re looking at somewhat lower profit margins ahead, with the company intending to keep prices down and spend more on promotions and marketing. I believe this is the right strategy as Boohoo continues to reel in new customers not only in the UK but also increasingly in the US, Europe and the rest of the world.

The City expects EPS of 2.8p (an increase of 27%) when the company reports results for its financial year ended 28 February later this month. At a current share price of 150p, the P/E is over 50. However, Boohoo has a long growth runway and with annual EPS growth forecast to continue at a high-20s percentage for as far as the eye can see, I believe the premium P/E is worth paying.

Despite occasional profit lumpiness from factors beyond its control, this FTSE SmallCap firm, which is valued at £130m, has nevertheless delivered an impressive annualised total return for shareholders of 12.9% over the last 10 years (compared, for example, with 11.7% from blue-chip luminary Unilever).

Bright outlook

After a challenging year, the 2018 outlook for Carr’s is considerably brighter. In its agricultural division, a recovery in the US started in H2 and improved farmer confidence is evident in the UK. Meanwhile in engineering, the delayed major contract has come through and with the group’s August acquisition of NuVision Engineering also providing a good foothold in US nuclear markets, strong top- and bottom-line growth is forecast.

The analyst at Edison, which counts Carr’s as a client, has upped her normalised earnings per share (EPS) forecast from 11.6p to 12.5p, representing 33% growth on 2017’s depressed EPS. This forecast puts Carr’s on an undemanding price-to-earnings (P/E) ratio of 11.4 and a price-to-earnings growth (PEG) ratio of 0.35, which is deeply on the ‘value’ side of the PEG ‘fair value’ marker of one.

A forecast well-covered dividend of 4.2p, giving a yield of close to 3%, adds to the value on offer and I rate the stock a ‘buy’.

Re-rating

Also offering great-value growth, in my view, is AIM-listed but long-established M. P. Evans Group (LSE: MPE). At a share price of 820p, this palm oil producer from plantations in Indonesia is valued at £450m.

You’ll probably recall that the market re-evaluated Unilver’s shares after the Anglo-Dutch group rejected a bid from Warren Buffett-backed Kraft Heinz earlier this year. A similar thing happened with M. P. Evans. The value of the London-listed company was markedly lower than that afforded similar firms listed in Asia and a bid came in from a Malaysian conglomerate at 640p a share, followed by an improved offer of 740p. The board, backed by major shareholders, rejected the offer, saying it “very substantially” undervalued the company.

Still undervalued

While the shares are now up to 820p, I believe M. P. Evans remains undervalued. For one thing, an independent assessment of its assets, which it commissioned at the time of the bid, gave its equity an implied value of 1,082p a share. For another, the current price looks to markedly undervalue the EPS growth in the offing. The consensus forecast is for a 39% increase to 31 cents (23.7p at current exchange rates), followed by a 52% rise to 47 cents (35.9p) for 2018. This gives a P/E of 34.6, falling to 22.8 and an attractive 2017/18 PEG of 0.44.

With additional value from a running dividend yield of 2.2% (excluding special dividends) and the board committed to paying “enhanced dividends,” this is another growth stock that looks very buyable to my eye.

Victoria designs, manufactures and distributes innovative flooring, and I see a good investment lesson there — while many folk try to identify the next hot technological or business development when looking for growth shares, there are plenty more seemingly mundane opportunities right beneath our feet (literally, in this case).

Of course, hindsight is not really much good as an investment tool as it doesn’t say anything at all about the future, so what are the prospects for more of the same from Victoria?

Solid growth

I reckon they’re pretty good as I see the company growing organically and by acquisition. Analysts have an EPS rise of 22% forecast for the year to March 2018, giving us a forward P/E of 21 — and a further 10% boost the following year would drop that multiple to 19, and I think that’s decent value for such a tempting growth pick.

On the acquisition front, Victoria has just snapped up Ceramiche Serra of Italy, a ceramic flooring manufacturer, for up to €56.5m (£50.4m). Of that sum, €20m (£17.8m) will be held back and paid over the next four years, providing the business achieves its annual targets. That sounds like a canny acquisition strategy to me.

I’ll leave Victoria with a quote from executive chairman Geoffrey Wilding from the firm’s full-year results report in July: “I suspect few shareholders truly appreciate just how big our market opportunity in the UK and overseas is.“

Oil prospects

I’m talking palm oil here, and I don’t know how many investors see that as a big growth business. But I do, and I’ve been taking a look at M. P. Evans Group (LSE: MPE), which operates palm oil plantations in Indonesia.

At 815p and on a forward P/E of 34, dropping to 23 by 2018, many will not see the shares as good value. But I do, and it appears the company does too as it’s been buying them up for cancellation all year.

EPS has been volatile and flat overall for a few years, but that doesn’t bother me too much as the long-term nature of the plantation business means earnings don’t always fit conveniently with a company’s short-term reporting calendar.

The dividend is a bit erratic too, averaging around 2% to 2.5%, but I reckon there’s a good chance of a long-term progressive policy coming to the fore.

Ready for take-off

In its interim report on 30 June, the firm spoke of the maturing of its young plantings, revealing a 26% increase in crop as that continues. Actual crude palm oil production rose by 56%, and the firm saw its operating profit almost trebling — boosted by a 10% rise in the price of the valuable commodity to $735 per tonne.

Big forecasts for a 40% EPS rise this year, followed by a further 49% next, have given the shares a very handy boost, and they’ve doubled in just over 12 months.

Palm oil is used in so many industries, including food production, soaps and cosmetics, biofuel and bioenergy, and pharmaceuticals, that I see continued growth in demand for the stuff.

I reckon Victoria is a good long-term buy.

Gold-star prospect

Highland’s first-half production of 131,784 ounces, revenue of £147m and average gold price realised of $1,238 per ounce were all slightly ahead of the same period last year. EBITDA was 8% lower (as expected), mainly due to a stronger rouble, higher production costs and utilisation of low-grade ore at its Belaya Gora operation.

Despite the lower EBITDA margin — 50% from 54% — it remains within range of the most efficient gold miners. And total cash costs, which increased 15% to $509 per ounce, are still well below the industry median. Period-end net debt of $204m is reasonable for a company with a market cap of £520m ($670m) and a running net debt-to-EBITDA ratio of 1.3.

Highland’s operating efficiency and affordable borrowing costs mean there’s plenty of cash flow for both investment (it said today it’s seeing “substantial progress in each of the projects targeted for the company’s future growth”) and dividends for shareholders.

The City’s earnings-per-share (EPS) consensus for the current year is for a rise from last year’s 14.5 cents to 18.5 cents (14.3p), giving an undemanding price-to-earnings (P/E) ratio of 11.2 and a price-to-earnings growth (PEG) ratio of 0.4, which is deeply on the value side of the PEG fair-value marker of one. With the company also forecast to pay a dividend of 11.5 cents (8.9p), giving a gold-star 5.6% yield, I rate the stock a ‘buy’.

Substantially undervalued

The board of oil-palm plantations group MP Evans (LSE: MPE) rejected a 640p-a-share offer from Malaysian conglomerate Kuala Lumpur Kepong Berhad last October. And with the “immediate and unequivocal support” of major shareholders, also unanimously rejected an improved offer of 740p. The board said it “continues to believe that the revised offer very substantially undervalues the company, its unique position and its future growth potential.”

The shares are currently trading at 735p, giving a market cap of £405m ($522m). Like the board, I believe this very substantially undervalues the company. It commissioned an independent valuation of its assets at the time of the takeover bid, which gave a valuation of $665m, implying an equity value of 1,082p a share.

In addition to a still-cheap asset valuation, the earnings-growth rating of MP Evans is also attractive. The City’s EPS consensus for the current year is 29 cents (22.5p), rising to 42 cents (32.5p) next year, giving a P/E of 32.7, falling to 22.6, and a great-value PEG of 0.5. The board intends to pay an ordinary dividend of at least 15 cents (11.6p) for the current year, giving a yield of 1.6%. And while this could be bumped up by a special dividend, it’s the company’s cheap asset valuation and PEG rating that leads me to rate the stock a ‘buy’.

Low valuation

Reporting on Tuesday was palm oil and rubber producer Anglo-Eastern Plantations (LSE: AEP). It released a statement to coincide with its AGM. In the first five months of the year, the company’s own production of fresh fruit bunches (FFB) was 19% higher than in the same period of the prior year. FFB bought in was 105% higher when compared to the same period of the previous year, with the production of FFB and external crop purchases higher as the effects of drought and haze on the palm trees subsided.

The company’s new planting for the first part of the year was 809 hectares. New plantings remain behind schedule due to delays in finalising settlement of land compensation. The biogas plant in the Kalimantan mill has been completed. At the present time, the trapped biogas is flared while waiting for the final electrical works to be completed for the power generation.

Looking ahead, Anglo-Eastern Plantations is forecast to increase its earnings by 124% in the current financial year. This puts it on a forward price-to-earnings (P/E) ratio of just 5.5, which suggests that it trades on a wide margin of safety. Certainly, there is scope for its outlook to be downgraded. However, in the long run it could prove to be a worthwhile investment.

Growth potential

Also offering upside potential is fellow palm oil and rubber plantation operator MP Evans (LSE: MPE). Unlike Anglo-Eastern, it trades on a relatively high rating. For example, it has a P/E ratio of 27.4, which suggests that there may be limited upside ahead. After all, within the same sector it is possible to buy much lower-rated alternatives.

However, the P/E ratio does not take into account a company’s growth rate. In the case of MP Evans, it is forecast to report a rise in net profit of 52% in the current year, followed by additional growth of 26% next year. Both of these rates of growth are well ahead of the wider index. This could help to improve investor sentiment over the medium term.

Furthermore, when combined with the company’s P/E ratio, it puts the stock on a price-to-earnings growth (PEG) ratio of only 0.7. This suggests that there could be more upside ahead after the company’s 83% share price rise over the last year. Certainly, the production of any commodity can lead to high volatility and uncertainty in terms of the price received. But with a wide margin of safety, MP Evans seems to be a shrewd long-term investment.

Production and profits on the rise

Shares of KAZ Minerals (LSE: KAZ) are up 34% in October, extending their rise since the start of the year to 190%.

This FTSE 250 Kazakhstan copper miner is ramping up production at its Bozshakol and Aktogay projects. The company produced 81 thousand tonnes of copper cathode equivalent in 2015 but expects production to rise to 135,000 to 145,000 tonnes this year.

City number crunchers reckon the increased output will drive a leap in pre-tax profit from £8m to £80m, followed by a rise to £148m in 2017. KAZ is trading on a modest 12 times 2017 forecast earnings at a current share price of 296p, which suggests the shares could continue to advance.

However, I’m a little wary of the geographical concentration of KAZ’s assets and its high level of net debt — $2.6bn versus a market capitalisation of £1.4bn ($1.7bn) — although the company says it has “strong support” from its lenders.

“Substantially undervalued”

M. P. Evans (LSE: MPE) has gained 49% in October after the shares shot up last week on a takeover bid. The bid came from £5bn Malaysian conglomerate Kuala Lumpur Kepong (KLK). At 640p a share it valued the AIM-listed owner of palm plantations in Indonesia at £360m.

M. P. Evans rejected the approach, describing it as “highly opportunistic.” The board said the offer “is wholly inadequate and very substantially undervalues the company, its unique position and its future growth potential.”

Peer companies listed in Asia are valued more highly and M. P. Evans’ board has the backing of a majority of shareholders, who are reportedly looking for an offer of at least 780p.

So, this is very much a gamble on whether there’ll be a higher offer — from KLK or another party — and whether any offer that may be made will be high enough to satisfy shareholders. My hunch is there may be value in M. P. Evans at its current price of 618p, but I’m not going to commit money on a hunch.

The Kaye factor

Restaurants group Richoux (LSE: RIC), which operates the Richoux, Dean’s Diner and Villagio brands, has looked like a business lacking direction for a long time. However, that looks set to change with the company announcing that Jonathan Kaye is to be appointed as chief executive. Kaye is the founder and former boss of Prezzo and comes from a family that has successfully rolled out numerous restaurant chains, including Ask and Zizzi.

Richoux is seeking shareholders’ approval for a generous incentive plan for Kaye, which will give him 14% of the company if the shares reach 40p, rising to 20% if they reach 55p. The company also needs to get a waiver from the Panel on Takeovers and Mergers, because members of the extended Kaye family already have a sizeable shareholding in Richoux.

I’ve little doubt that the plan will be approved and the waiver granted. I also have little doubt that Kaye has the ability to deliver. The shares are up 38% in October to 29p (they spiked as high as 38p at one point) and I believe Richoux might just be a canny investment, based on its valuation of two times current sales and the Kaye factor.