Agriculture Sector H2 2018 Outlook: Supply Deficit to Offset the Impact of Fall in Prices

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·         We are still positive about the agriculture sector despite the recent fall in prices of Crude Palm Oil and Rubber, our opinion is premised on the fact that there is still supply deficit in the local market. While the recent stability in the foreign exchange market could have encouraged the importation of crude palm oil, we opine that the ban on importers of the 41 items (including crude palm oil) from accessing FX from the official market could help to preserve the market for local players. 

·         Most companies in the agriculture sector have enjoyed low interest rate environment through the government intervention programmes such as Anchor Borrowers Scheme, Commercial Agriculture Credit Scheme and others. This could have supported the favourable finance cost of these companies in H1 2018 and it may continue in H2 2018 as the Federal Government is committed to encouraging credits to the agricultural sector. 

·         We expect Okomu Oil’s rubber expansion plan to help to diversify its revenue base and generate foreign exchange income, which may be used to hedge against the company’s FX exposure. Similarly, we believe the recently commissioned plant, Extension 2 Estate, by Okomu Oil may increase the company’s production capacity and support its top line performance in the long run. 

·         On the other hand, we expect Presco’s 15,000 hectares expansion project to continue to support its top line growth over the medium to long term. The company intends to plant 4000 hectares in 2018 and another 4000 hectares in 2019. However, the volatility in revaluation gain on biological assets, for Presco, is a concern considering the impact it has had on the company’s PBT performance. 

·         Overall, we opine that companies in agriculture sector could benefit from the expected improvement in consumer demand due to election spending and stability in FX market. In the same vein, we believe the potential for wage increase could be supportive of consumer spending though it appears this may not happen in the near term.

·         We also believe expected higher sales volume in the Consumer goods sector could trickle down to the agro allied and agriculture sectors in terms of intra sectoral linkages through demand for items like crude palm oil which is used to produce other consumer goods.  This could support top line growth of companies in the agriculture sector in H2 2018. However, we highlight that the feedback from consumer names on potential increase in volume in H2 2018 has been mixed.