Kuala Lumpur Kepong Berhad’s (KLK) $441 million hostile bid for M.P. Evans today sent MP Evans shares up 45 percent to a 2016 high of 624.50 pence, within 4% of KLK’s bid takeover price. In response, KLK’s shares traded relatively unchanged at MYR 24.20. MP Evans may be more attractive to Malaysian buyers as the ringgit has appreciated 16 percent versus the pound since the June 23, 2016 UK Brexit vote. If finalized, under the deal MP Evans’ current shareholders would receive 642.25 pence per share including the recently announced 2.25 pence H1 2016 dividend.
MP Evans is a UK AIM-listed agri-business company with 26,600 ha of majority-owned palm oil plantations. The company has 8,100 ha of associated smallholder cooperative palm oil plantations, and a young average palm age of 7.9 years. It has 9,600 ha currently under development. Its H1 2016 profit was up to 17 percent year-over-year to $18 million, compared with $15.4 million during the same period in 2015. Much of this year-over-year increase was based on unrealized foreign exchange translation gains on a stronger Indonesian Rupiah. Some of MP Evan’s estates have above average oil extraction rates at 23.6% in North Sumatra and 26 percent in Kalimantan. MP Evans has been in the process of seeking opportunities to dispose of their small Bertam Estate and a 40% interest in Bertam Properties.
MP Evans is a member of the Roundtable of Sustainable Palm Oil (RSPO) and the Indonesian Sustainable Palm Oil (ISPO) system. It supports some No Deforestation, No Peat, No Exploitation (NDPE) related policies such as piloting methane biogas capture for electricity generation on some properties and applying integrated pest management on others. MP Evans does not have an explicit No Deforestation, No Peat, No Exploitation (NDPE) policy. NDPE policies are a procurement requirement for many of the largest corporate buyers globally.
KLK is an integrated palm oil producer, with 66 percent and 33 percent of its profits derived from its plantations segment and oleo-chemical divisions, respectively. KLK also has a minor property division. KLK stated it plans to finance the MP Evans deal through bank lending, yet to be announced.
KLK Purchasing Revenue and Certified Palm Oil Producers
Two other major producers of certified sustainable palm oil (CSPO), IOI and Felda Global Ventures, jointly hold 19% of the total RSPO-certified sustainable palm oil on the market. KLK, which had a 6% global market share, may benefit from the deal through purchasing MP Evans CSPO assets.
While this deal is expected to be accretive to net income, it is uncertain what impact KLK’s pending purchase of MP Evans may have KLK’s margins. 20-25 percent of KLK’s fresh fruit bunches and 8-10 percent of its rubber remain third party sourced, with limited disclosure of the supply chain. As of Monday October 24, 2016, KLK did not yet own any shares in MP Evans. KLK presented a similar offer to the Board of MP Evans on October 13, 2016 that was rejected.
It is uncertain if KLK is attempting to buy its way into the responsible sourcing conversation, without changing all of its existing practices to conform with industry best practices.
PT Tualang Raya Clears Rare Forests Possibly Violating Customers NDPE Policies
PT Tualang Raya reportedly is clearing forest inside the Leuser Ecosystem region, which would be in clear violation of many buyers’ corporate procurement policies. Possible buyers impacted may include Musim Mas Group, Wilmar International, and Golden Agri-Resource. The Leuser Ecosystem region is a critical habitat area for many rare species, including the remaining global populations of Sumatran elephants. Given that palm oil from these cleared forests will enter into corporate supply chains, palm oil from PT Tualang Raya could create significant reputation risks for downstream buyers.
This independent research was written for Chain Reaction Research.