Tuesday, October 04, 2016 12:44pm / FBNQuest Research
Favourable prospects for the Nigerian palm oil sector...
With a supply gap of about 500,000 metric tonnes (mt) and fertile arable land for cultivation, the untapped potential of the Nigerian palm oil sector is large.
The main producers, Okomu Oil and Presco, have continued to increase their plantation area and are on course to meet their 2018 and 2020 targets of growing their respective land area to 12,000 hectares (ha) and 20,000ha.
In 2015, mature land constituted about 95% of the total land area for both producers combined, growing by 10.8% for Okomu and 46.2% for Presco.
Total crude palm oil (CPO) produced during the year increased by 12% to 35,600 tonnes (te) and 10% to 39,328te for both companies respectively.
We expect both companies to surpass their targets by 2017. For 2016E specifically, we forecast sales growth of 24.5% and 38.8% for Okomu and Presco, and PBT growth of 62.7% and 43.7%.
...supported by recent government policy
A weak macroeconomic environment in Nigeria has put significant pressure on the naira. This has put competitors at a significant disadvantage to domestic producers – and that is assuming the competitors can source fx successfully.
Sourcing of fx has become difficult because the central bank has banned importers of CPO (along with several other products) from accessing fx at the interbank market. As such, users of CPO such as FMCG companies are patronising domestic producers more, at the expense of importers of palm oil.
This partly explains why Okomu and Presco recorded healthy growth in sales and PBT in H1 2016: on average, sales grew by 55.8% y/y while PBT grew by 123.7% y/y. The fx sourcing issues for importers has carried on into H2 2016.
Rubber not providing as much benefit
Presco is yet to start producing rubber as it seeks to diversify away from palm oil like Okomu has done.
For Okomu, although rubber brings in desired fx (since it is largely exported), its contribution to the topline has decreased in recent times due to unfavourable pricing in international markets.
The product now accounts for 20% of sales compared with 40% in 2011. Pending a recovery in prices, we expect rubber to continue to be a drag on Okomu’s performance.
As for Presco, although it has spare land for cultivation and more land is being acquired, planting of rubber has not commenced.
We do not expect any contribution from rubber to Presco’s sales in the near term given that it takes 7 years for planted rubber to reach its productive phase.
Sector outperforming the broader market
Having gained an average of 27.1% in 2015 (vs -17% for the NSEASI), the palm oil companies have outperformed the index year-to-date. Okomu and Presco have appreciated by 21.2% and 25.4% respectively (vs -1.4% ytd for the NSEASI).
The companies’ fundamentals are also supportive. While Okomu currently trades on 2016E P/E multiple of 8.7x for 1.9% in 2017E, Presco is trading on 10.6x for EPS growth of 4.3% in 2017E.
These compare with around 40.1x on average for the fast moving consumer goods companies under our coverage, and 17.4x, 33.0x and 26.2x for international peers in Indonesia, Malaysia and Singapore.
From current levels, we see potential upside of 5.6% on average for both companies. We rate both stocks Neutral.
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