Given the current tragic situation in Ukraine, it is hardly surprising to see a shift across the investment front as to what to buy, hold or even sell. On a personal level, I recently bought some BAE in anticipation of events going the way they have, along with a few PEN at what I considered to be an attractive level.
Whilst BAE by yesterday had improved some 20% from my entry point, PEN in contrast has thus far remained flat, perhaps not surprising given its micro-cap nature.
That said, if and when things calm down in Europe, I rather expect PEN to be a beneficiary of increased defence spending in specific regions.
After all, the company works for and with big blue chip players such as Lockheed, Rolls Royce and BAE and is something of a specialist quality niche operator.
Moving on, another stock I hold and have decided to add to is DKL, Dekel Agri Vision which is concentrated on the Palm Oil space, along with a new and evolving interest in Cashew Nuts.
It is a company I covered here back in May of last year, so background below, including an interview with the CEO https://martinflitton1.wixsite.com/privatepunter/post/dkl-looks-set-to-deliver-10-05-21.
The attraction here at 5p per share is quite simple, being exposureto a commodity that has seen extremely strong and increasing prices, a trend that is unlikely to change anytime soon.
By January of this year the price of crude palm oil (CPO) had doubled from that of the onset of the pandemic in 2020 and more recently it has hit a staggering $1,685 per tonne.
Whilst that number is perhaps enough to make one sit up and pay attention, news from Reuters this morning suggests that there is even more to come.
The article cites CPO in Bombay being offered at $1925 a tonne, which makes it the most costliest of the edible oils for the first time. This has in part come about due to the disruptions to sunflower oil shipments that have impacted the major Black Sea exporting region as a result of the Ukraine conflict.
The knock-on effect for DKL has surely got to be positive and with the company already sitting well placed, the current trend bodes extremely well for the business moving ahead.
Aside the Palm Oil business DKL is now, (albeit later than first envisaged) active on the cashew front with its long-awaited operation now up and running.
The global cashew industry has been growing rapidly over the last ten years as consumption of the nuts increased across the board. Indeed, the market for raw cashews is forecast to grow at an annual rate of 4.27% and is expected to hit $7bln by 2025.
DKL itself recently reporting another excellent month of palm oil production with record prices being achieved, although the shares have barely budged.
That must surely change at some point and with the cashew processing plant now delivering pilot sales, the risk/reward looks skewed for the upside to my mind.
Although following heavy investment and development DKL has net debt on the balance sheet, this is forecast to reduce sharply as cash rolls in and is expected to fall from £22.8m to £13.9m over the next year.
Importantly in that context, the free cash flow yield for full year 2022 is forecast to come in at 27.3% by broker Arden, where adjusted EBITDA should move from the expected 2021 figure of £4.9m to £9.6m.
Full year 2022 revenue is pencilled in at £49m with adjusted pre-tax profits of £5.5m which in turn would deliver EPS of 1.1c or 0.82p, implying a forward PER of 6 at the current price.
Just how long the CPO will continue to hit new or maintain recent highs is something of an unknown of course, but the trend, given ongoing supply issues and inflationary pressures suggests that they are likely to remain firm for sometime to come.
DKL has been building and expanding the business over a number of years now and it is fair to say that it hasn’t been plain sailing.
But, it now looks to be in a very sweet spot to deliver, where if those positive numbers are announced as anticipated in due course, a much awaited rerating should duly follow.
Arden not surprisingly has a buy note on the stock and recently commented- “Dekel Agri-Vision trades on an inexpensive 5.4x 2022E EV/EBITDA. Our longer-term CPO pricing assumptions are conservative and 5-year World Bank CPO price forecasts of over $1000/tn are supportive of further earnings upgrades. Additionally, medium term operational assumptions for the cashew operations are highly achievable and with now much reduced execution risk, we see plenty of upside, further earnings upgrade potential and increasing shareholder returns”.