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MP Evans upbeat on palm sector, despite looming 'price pressure'

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MP Evans flagged an "encouraging" outlook for the palm oil industry, despite foreseeing "some pressure" on prices ahead from a recovery in South East Asian output, which was evident at its own plantations.

The London-listed palm oil producer - which last year fought off a takeover from sector giant Kuala Lumpur Kepong - said that a rebound in industry output in top producing country Indonesia and second-ranked Malaysia from last year's drought-affected levels was "likely to exert downward pressure" on prices of the vegetable oil.

"Production in Indonesia began a recovery during the last quarter of 2016, and a similar turnaround was expected in Malaysia during the first quarter of 2017," Peter Hadsley-Chaplin, the MP Evans chairman, said.

The group's own crude palm oil output, at 99,900 tonnes in the January-to-March period, at its was up 15.0% year on year, after its plantations, which are in Indonesia, "benefited from the increase in rainfall that accompanied the end of the dry weather occasioned by the El Nino weather pattern".

Official data next week on Malaysia's total palm oil production in March are expected to show output of 1.39m tonnes, a rise of 14.0% year on year.

'Price volatility'

MP Evans forecast pressure on palm oil prices hitting home "especially during the second half of" this year, as the impact of improved supplies builds, with prices for now remaining affected by the fall in stocks prompted by the production downturn.

"Low levels of physical supply in the first part of the year [2017] could lead to some price volatility," Mr Hadsley-Chaplin said.

"Stocks of crude palm oil began 2016 at record-high levels, but were drawn down during the year in response to low production and finished the year at a multi-year low level of less than 10m tonnes."

Nonetheless, the group remained upbeat over prospects for palm oil, which "because of its high yield and low cost of production, is well placed to continue to benefit from increasing demand for vegetable oil.

"The outlook, therefore, remains encouraging."

Earnings rise

The comments came as MP Evans reported a 39% jump to $35.3m in earnings for 2016, on revenues up 15.6% at $83.9m.

Earnings excluding assets sold last year, including stakes in Australian cattle business Napco and palm oil producer Agro Muko, more than doubled to $16.4m, helped by rising value, which saw the group raise by 19.0% to $595 a tonne its average mill-gate sales price for crude palm oil.

The group achieved a 61% jump to $514 a tonne in prices of palm kernel oil, the market for which received an extra boost from a squeeze on supplies of rival coconut oil.

MP Evans confirmed a final dividend of 12.75p per share for 2016, taking the total for the year to 20p per share, including the interim payment, and a special dividend paid in August.

And it underlined the prospect of increased payouts ahead, flagging an "intention to maintain or increase its dividend in future years, starting with a dividend of at least 15p per share in respect of both 2016 and 2017".

The increase will come despite plans to invest in extra palm oil land, with MP Evans revealing it was in "active negotiation for substantial new hectarage", seen lifting the size of its East Kalimantan operation by 5,000 hectares to 20,000 hectares.

Market reaction

The statement was welcomed by analyst at Peel Hunt as showing "strong results and good start to the year", with the broker restating a "buy" rating on MP Evans shares, with a price target of 880p.

FinnCap, restating a "buy" recommendation on the shares with an 835p price target, said: "We see these as a good set of results, especially in a post-El Nino environment when [oil palm] yields were under a lot of pressure."

And VSA Capital analyst Ed Hugo said that "given the torrid time experienced by many palm oil producers during 2016, MP Evans needs to be commended for its full year results".

Mr Hugo also flagged that Kuala Lumpur Kepong (KLK) has been building its stake in MP Evans though open market purchases, and "is free to try again in nine months" to buy the London-listed group.

However, he said that the shares, while appearing "well supported at the current level", were "unlikely to see much upside from here, except in the case of a stronger bid from KLK.

"We would remain holders of MPE having been strong buyers through 2016."

MP Evans shares stood 0.3% higher at 745.72p in lunchtime deals.

By Mike Verdin

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