Tuesday, June 07, 2016 9:08AM /Vetiva Research
The Nigeria oil palm industry has been in the spot light in recent times following the exclusion of Palm oil importers from accessing the CBN FX window. In our view, the move would support a reduction in the importation of palm oil products, thereby boosting local production.
We estimate that about $320 million was spent importing 600,000 MT of CPO in 2015. In light of the industry shake-up, we take a closer look at the Nigeria oil palm sector, examine its development over the years, as well as prospects going forward.
We think it is about that time to extract more value from the sector. Consequently, we initiate coverage on the biggest quoted players in the Oil Palm industry - PRESCO (TP: N43.38) and OKOMUOIL (TP: N42.11) with BUY ratings.
Nigeria Agriculture Sector, a low hanging fruit
In our October 2015 report titled Nigeria Agricultural Sector - Re-Cultivating Value, we stressed that Nigeria’s increasing call for national revenue diversification, climbing food import bill and fragile food security have been redirecting government focus to the Agriculture sector in recent years. Whilst the call has grown much louder since the significant decline in crude oil prices, the agriculture sector continues to appeal as a key “first-choice” diversification route amongst other sectors.
Policy pointing toward support for local production
Amidst weak crude oil prices and consequent pressure on Nigeria’s foreign reserves, the Central Bank of Nigeria In June 2015 announced that it would no longer fund the import of some forty-one items via the official foreign exchange window, “Palm Kernel/Palm Oil Products/Vegetable oils” included.
By January 2016 (when crude oil prices hit new lows), the CBN placed more restrictions on FX supply, announcing the discontinuance of sales of FX to BDCs, as well as its discretionary intervention in the inter-bank FX market.
Effectively, importers of Palm Kernel/Palm Oil Products/Vegetable oils have to source foreign currency from autonomous sources, most likely the parallel market where rates are almost doubling that of the official market. The resulting short supply of FX and/or higher cost will make imports less competitive, a boost for local production.
Oil Palm supply - a lot of catching up to do
At 970,000 MT per annum, local oil palm production had grown at 1.2% on a 50-year CAGR to 2015. Outpacing the growth in local production, oil palm consumption has grown at 2.8% over the same period as rising food demand by the growing population and increasing industrial use of oil palm products continue to expand the demand for the commodity.
At 1.54 million MT, total consumption creates a shortfall of about 600,000MT which is currently met through imports from far Asian countries including Malaysia and Indonesia. Bridging the supply shortfall presents a huge upside for investment in local oil palm market.
PRESCO and OKOMUOIL positioned to benefit from industry shift
With decades of experience in the Nigeria oil palm industry, strong technical support from international parent companies, plantation base to support future growth and integration along the value chain, we believe that PRESCO and OKOMUOIL as leaders of the domestic oil palm industry are well positioned to benefit from ongoing happenings in the sector, and the broader agriculture space. We therefore initiate coverage with BUY ratings on PRESCO (TP: N43.38) and OKOMUOIL (TP: N42.11).
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