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parliamentarian evans (LSE: MPE) is a small-cap stock that has caught my eye for many good reasons. This company with a market capitalization of £456m has grown its revenue by 27% per year on average over the last five years. Their average operating margin of 24% is impressive. Cash flow and earnings per share grew 33% and 44% on average every year for half a decade.
The company continues to impress with its balance sheet. Liquidity looks great as current assets are at least double what current liabilities are. A debt-to-equity ratio of 0.35 means low leverage. So far, so good. But the business MP Evans is in makes me stop and think.
Troubled Palm Oil Production
In 2015 I was in Penang, Malaysia. The air was hazy and smelled of smoke. This smog had moved across the sea from Indonesia, where the forests were burning. The World Resources Institute suggests that most of the fires are human-caused and related to the agricultural industry, particularly palm oil, of which Indonesia is the world’s largest exporter.
MP Evans is an Indonesian palm oil producer. However, he argues that he does it sustainably. All palm oil produced on company-owned farms is certified sustainable in accordance with the Roundtable for Sustainable Palm Oil standards. The same is true for managed smallholders. But the company also accepts oil palm fruit from unverified independent growers for its mills. As of 2020, the date of the last independent sustainability report, 27% of total production could not be confirmed as sustainable.
The plan is to increase that number to 100% sometime next year. That would be reassuring. But why accept unverified products? Why not just take from small farmers when the company is satisfied that they produce sustainably? Well, because the company can process significantly more oil palm fruit than it and its verified small growers can grow.
Small Cap Stocks Watch List
MP Evans is also currently exiting its property development operations in Malaysia. It divested 70 hectares of land from a wholly owned subsidiary to a joint venture in 2021. It still has 200 hectares left. I’m probably being cynical, but this arrangement suggests there is scope to sell parcels when group earnings are not expected to meet forecasts. However, I like MP Evans’s plan to focus on one thing: palm oil.
Palm oil is the world’s most popular and traded vegetable oil. Demand has increased by 7% every year since 1990. According to a report, about half of the products in UK supermarkets contain palm oil. It seems to be a decent business to be in. And the company’s operating numbers back it up.
However, it is worth noting that the company’s operating margins tend to decline when the average annual price of crude palm oil falls and rise when it rises. This is because it is a price taker in a commodity market.
All things considered, though MP Evans is now deservedly on my watch list, he still won’t end up in my Stocks and Shares ISA. The next independent sustainability report will be published soon. I’d like to see what progress has been made on this front and see how I feel about these small-cap stocks at that point.
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