Weekly Market Commentary | 5/12/2023 | MPE, LTHM, MIND | The Singapore Comparison

Bruce ponders why some companies that operate in the same sector enjoy such radically different fortunes. Companies covered MPE, LTHM, and MIND.

The FTSE 100 rose +0.6% to 7,506 last week. The Nasdaq100 was flat, while the S&P500 rose +0.8%. The price of gold rose +2% to $2,035, which seems to have been driven by expectations of US interest rates peaking. GLD is now up +12% YTD. Former hedge fund manager Russell Clark has been writing an interesting substack around the macro trade of “long gold, short TLT” which has been working well for him.

Thank you to Jamie for covering for me while I visited friends in Perth, Western Australia and then stopped off in Kuala Lumpur, the capital of Malaysia on my way home. My travels meant that I missed the Mello Conference in London last week but I did meet up with Sharepad user Carcosa, a retired pilot and aviation industry specialist in Kuala Lumpur. I promised him over a gin and tonic that I would look again at Avation, the Singapore headquartered aircraft leasing business.

I’m intending to write up my research on AVAP over the holiday season when newsflow and company results dry up. *

Malaysia itself is an interesting mix of religion (Islam), and population (Chinese and Malaysian) alongside British institutions (they still drive their cars on the left side of the road). There’s a huge boom in high-rise luxury apartments and office buildings currently going on, the tallest building in Asia is Merdeka 118, which stands at 679m and 118 storeys, now the second tallest building in the world behind the Burj Khalifa (828m) in Dubai. Carcosa told me that KL locals think Merdeka resembles a Motorola “brick” phone from the 1990s, because of the 118m spire.

Skyscrapers can be an interesting indicator of economic conditions. Previously the highest building in Asia was the 88-storey (452m), Petronas Towers also in Kuala Lumpur, which was completed just in time for the 1997-1998 Asian crisis. Kuala Lumpur certainly makes an interesting contrast to Perth, which has benefited from an iron ore mining boom driven by Chinese economic development, but where wealth seems to be more evenly distributed with most people living in a detached house with a garden and the Central Business District containing just a handful of skyscrapers.

It is also an interesting question why Malaysia hasn’t done as well as Singapore. Normally you would expect two neighbouring countries (for example Germany, Denmark) to enjoy similar prospects, regardless of population size. But Malaysia has lagged behind Singapore significantly, indicators like average salary and GDP/per capita are 4x lower in Malaysia than Singapore. Charlie Munger, who died last week, suggested management (in the form of Lee Kuan Yew) made a huge contribution to Singapore’s success story.

Malaysia v Singapore strikes me as a similar question as to why some companies in the same sector enjoy such different fortunes. An obvious example is the two low-cost airlines Ryanair v EasyJet, Sharepad shows RYAN is up almost 3x in the last decade, compared to EZY which has fallen by -35%. Over longer time periods the Ryanair outperformance is such that the Irish budget airline’s market cap at £17bn is now 5x larger than EasyJet.

Jet2 (previously Dart) has also been an incredible long-term performer. The log chart below shows that it is up by 100x since its nadir in mid-2008, which is all the more remarkable as travel companies and airlines are not usually where investors hunt for multi-baggers.

If you were searching for a country with a competitive advantage and high GDP per capita, you probably wouldn’t start your search along the equator, where Singapore is located. Perhaps another reason why I should have a second look at AVAP?

This week I look at palm oil plantation owner MP Evans, timber company James Latham and corporate training company Mind Gym.

M.P. Evans acquisition

Last week this Indonesian and Malaysian palm oil farmer announced that it had completed the acquisition of two palm plantations in East Kalimantan, which together have 8,350 hectares of planted hectares – of which 6,664 hectares are directly owned and 1,686 are managed on behalf of smallholder co-operatives. The price was $59m, or $8,900 per group-owned hectares, plus a working capital adjustment of $4m.

Palm oil was supposed to be a beneficiary of the conflict in Ukraine, as a substitute for sunflower oil. However, Sharepad shows that hasn’t worked out well, with palm oil futures (Sharepad ticker CPO-MT) down -12% last year and -10% this year.

M.P. Evans announced H1 results in September, with revenue down -21% to $134m and PBT down -64% to $22m. That still works out at a margin of 17%, despite the unfavourable commodity price movement. Net cash was $2.5m, though that will swing to net debt as the group is taking on $22m of bank debt (denominated in Indonesia Rupiah) to finance the acquisition of the East Kalimantan estates.

Sustainability: Palm oil can be controversial as palms can replace virgin rainforest which has taken millions of years to develop as a complex ecosystem, supporting rare plants and animals. However, when produced sustainably it represents a high-yield, low-cost vegetable oil. MPE says all areas are developed and managed sustainably, which means no deforestation or burning, plus conservation areas within each estate. MPE has 96,500 tonnes of certified sustainable production, a +7% increase on the previous half year, though that represents 58% of their total output.

Processing: M.P. Evans not only farms “fresh fruit bunches” but also owns 6 mills that process both their own crops and additional supply from independent farmers. Production from the group’s own mills rose +13% 159,100 tonnes. Total production costs per tonne fell in H1 of this year to $574 per tonne (2022 $598) but from the group’s own hectares rose $535 v $425 per tonne, as they experienced cost inflation in fertilisers. A reminder that commodity price inflation does not always benefit commodity producers if they have to pay higher input costs for energy and inflation.

Ownership: Malaysian company KL Kepong owns 24%, which itself owns 300,000 of planted hectares, Nokia Bell pension fund 11%. Other than that abrdn and Schroders own 6% and 4% respectively.

Valuation: Cavendish has forecasts of $1.18 and $1.4 EPS for FY Dec 2024F and 2025F, which represents a PER of 8x and 7x respectively. The forecast dividend yield is a 6.9% 2024F dividend. M.P. Evan’s website gives a detailed breakdown of valuation by plantations, smallholders, and associates by market value per planted hectare and market value attributable to the group. They also have $49m of property backing in the form of Bertram Properties. This gives an equity value per share (by their calculations of £15, versus a current share price of £7.46).

Opinion: I bought shares earlier this year after having a dream about a former CSFB colleague called Matt Evans, who quit his job in equity research to become a drummer in a rock’n’roll band. Obviously, I didn’t buy shares just because of a weird dream about someone that I used to work with decades ago, but it did nudge me to do further research into palm oil companies. Competitor Anglo-Eastern Plantations (market cap £270m) has a 3-year historic RoCE of 13.5%, and trades on less than 5x historic earnings, though there are no forecasts in the market for future earnings estimates. I think the valuation of these stocks looks attractive, although much does depend on the longer-term prospects for the palm oil price, which is down over -40% from its peak in H1 2022.

James Latham H1 to September

This company with a 260-year history has been listed on the stock exchange since 1965. It is still run by the original Latham family (9th generation) and imports timber (solid wood), wood-based panel products (such as fibreboard, chipboard, and plywood), engineered timbers, door blanks, decking, mouldings and decorative surfaces. They reported H1 Sept revenue down -10% to £213m and statutory PBT down -31% to £16m. They say that is driven by increased competition and weaker market conditions for building materials, presumably as the house building and construction sector has reacted to higher interest rates and other cost pressures. Cash has actually increased to £66m v £37m Sept last year, though that movement in cash largely happened in H2 last year.

Latham’s strategy is to secure discounts by being a cash buyer so that £66m can’t all be distributed to shareholders. In the past FCF cash conversion has been weak, because of that strategy (3-year average 55%) but the weaker revenue environment seems to have helped the cash conversion. They say that they continue to take advantage of discounts in return for early settlement with their suppliers and are now generating around £4m of annualised interest from their cash.

Worth noting that the +54% jump in revenues FY Mar 2022 (see chart above) was mainly caused by a +36% increase in the cost of their timber products, plus a small acquisition of IJK Timber in Northern Ireland.

Outlook: H2 sounds similar to reported trends, both in terms of margins and volumes. They do say that some contracts are being postponed, but not cancelled. There’s also been a shift to lower-value products, where LTHM has gained market share, and they expect this trend to continue. The board believes FY Mar 2024F numbers will be in line with expectations.

Pension surplus: As you would expect from a 265-year-old company there is a £75m pension scheme. However, the triennial actuarial review was concluded earlier this year and is showing a surplus of £10m, meaning that they will no longer pay £3m a year of deficit funding (which works out at 12% of forecast PBT).

Valuation: The shares are trading on 11x PER FY Mar 2024F and 2025F, with flat EPS next year. The forecast dividend yield is 2.8%. That seems good value for a company that has reported a year average 22% RoCE – though see my comments on cash conversion to understand that CashRoCI has averaged less than half that amount.

Opinion: The company appeared on Maynard’s 10% CAGR dividend growth and PER of less than 15x screen in April this year, and he set an alert to buy if the price dropped below £10. I also like it, though I do wonder if we will continue to see short-term weakness as the house-building and construction sector continues to struggle in 2024.

MindGym H1 to September

Management describe their business as a “global provider of human capital and business improvement solutions”. I would suggest that they are somewhere between a management consultancy and a training company. LTG operates in a similar space and has also struggled both last year and this year. MIND have some case studies on their website here. Management put up this slide showing their market size is a $370bn opportunity, which I would take with some salt.

I read the Chief Exec’s book (also called ‘the mindgym’), published in 2005 a while ago, and can remember I rather liked it. I see the paperback version is now selling for less than 50p on Amazon, so that seems a value-for-money way of doing further research into their business.

Revenue was down -22% in H1 Sept to £21m and they made a statutory LBT of £13m. That decline was caused by clients undertaking restructuring programmes and so, deferring training spend, plus a general level of caution in the corporate training market, which pushed out timeframes and procurement of new projects. They say this was particularly pronounced in the US, where revenues fell by a third to £11m. So unlike traditional management consultancies that can benefit when companies restructure and make employees redundant, MIND seems particularly vulnerable to training budgets being cut.

The company had £2.1m of cash at the end of September and a £10m undrawn debt facility. They have announced that the Chief Exec and founder Octavius Black will become Exec Chairman, and they have hired Christopher Ellehuus as CEO designate (joining in January, to become Chief Exec following the FY Mar 2024 AGM in July next year).

Outlook: They are trading in line with the revised down FY March 2024F expectations (profit warning was in October). They talk about substantial growth in their pipeline, including multi-year, multi-million-pound deals. They do warn that conversion remains slow in the USA though. They expect a strong return to profitability in H2 and re-iterate a medium-term EBITDA margin of 15-20%(10% in FY Mar 2023, 3% the previous year).

It is worth noting that the company reports a gross margin of 85%, as it is an information business, so if this is scaleable it could see significant operational leverage. Management makes this point in their slide desk, suggesting that they now have a platform (yes, that word!) to deliver 20 years of Intellectual Property, virtually or in person.

The other aspect of the numbers is that there is £8m of intangible assets on the balance sheet (versus shareholders’ equity of £11m). During H1, they impaired £6.6m of software development costs in the period, in response to the revenue disappointment and decided to pause their funding of longer-term activities not currently generating revenue. In the previous two years, they had capitalised over £10m of development costs onto their balance sheet, meaning that intangibles had grown from less than £3m a couple of years ago to over £12m Mar 2023 year-end. I think that is the correct accounting treatment, but readers should be aware that the cashflow is not as impressive as the historic reported profits would suggest. The Sharepad chart below shows the trend in intangibles and cash to the end of March this year before this half’s £6.6m writedown.

Ownership: The founder Octavius Black still owns 55%. Institutions on the register include Liontrust 12%, and Baillie Gifford just under 4%.

Valuation: The shares are trading on 30x PER Mar 2025F, though that implies EPS recovers to 1.34p. In FY Mar 2019 they reported almost 7p of EPS, and there’s been no increase in sharecount since then. If you think that 7p (or £5m of EBIT) is attainable in the medium term, then that would imply a mid-single-digit PER.

Opinion: The chart looks very bombed out but perhaps a good way to play the recovery if that suits your risk appetite. There’s a chance of another profit warning if we see a recession in the US or the rest of the world. But they are still net cash despite the difficult trends recently, and at some point, activity should recover. Before the pandemic, they were reporting an EBIT margin in the mid-teens and RoCE of close to 40%. In summary, I think too early to turn positive with a high conviction, but at some point in future looks like MIND should be a good turnaround story.


* Merdeka 118 Photo by Filipe Freitas on Unsplash

Bruce co-hosts the Investors’ Roundtable Podcast with Roland Head, Mark Simpson and Maynard Paton. To listen you can sign up here: privateinvestors.supercast.com

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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.