December 12, 2019/Cordros Report
Surging Volumes to Lift Earnings; All Eyes on the Border
In this report, we discuss the outlook for the Nigerian Agriculture sector in 2020, with a key focus on the Palm Oil Industry. While we update our views on Okomu Oil Palm plc (OKOMUOIL), we initiate coverage on PRESCO plc (PRESCO) with a “BUY” rating, as we believe the long term outlook for the company is positive. For both companies, we believe the blend of higher CPO prices and stronger volume growth are short-to-medium term margin tailwinds.
Land Border Closure to The Rescue
In our H2-19 Agriculture sector update published in June 2019 – See report: Foundation Laid for a Leap of Faith – we rehashed the case for a stronger crude palm oil (CPO) price, which was helmed on the potential impact of the shrinking global supply glut picture. True to our prognosis, CPO prices have surged by 33.6% since that update (July-19 to date), benefitting from weaker crude palm oil supply, together with Malaysia’s and Indonesia’s B20 and B30 biodiesel mandates, which supported CPO demand growth. Ordinarily, better pricing in the global market should have dovetailed neatly into the domestic landscape, however, Nigerian CPO producers suffered a material decline in prices over Q2-19. The global price passthrough to the domestic market returned in Q3-19, occasioned by the closure of the border in Nigeria, which led to a significant reduction in the illegal influx of CPO.
OKOMUOIL at Premium to PRESCO, and Justifiably So
OKOMUOIL continues to trade at a premium to PRESCO (on a share price basis), with the latter commanding an average premium of c.25% over the former through 2019. We believe the premium is justified since OKOMUOIL outperforms PRESCO on key performance metrics we consider for palm oil producers – Enterprise value/hectare, Revenue growth, EBIT margin, and leverage ratio. However, in our view, PRESCO’s long-term prospects appear more promising than OKOMUOIL, given its current CAPEX intensity, which portends a massive upside relative to OKOMUOIL.
Lace-Up for Another CPO Volume Deluge
As expressed in our last sector update, we believe CPO operations in Nigeria are entering a new growth phase, with a total of c.9,000 hectares of mature plantation coming on stream between 2020 and 2021 – from OKOMUOIL’s Extension II. Meanwhile, we expect PRESCO to benefit from stronger volume growth. Our view is hinged on the expected c.8,000 hectares set to mature from its Sakponba estate over 2019/20E.
Click here to read full PDF copy of report
