| Agriculture |    2440 VIEWS  |
| Agriculture | |
| 2440 VIEWS | |
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Friday, June 28, 2019 10:50AM / Cordros Capital / Header Image Credit: Sustainable Square
In this report
we discuss the outlook for the Nigerian palm oil sector and the sector player
under our coverage over the rest of 2019.
Weaker Prices, Benign Volume Growth, Depressed Top-line Growth
Over Q1 19,
Nigerian palm oil producers had to grapple with the twofold setback of lower
domestic crude palm oil (CPO) prices and benign volume growth, with both
OKOMUOIL and PRESCO reporting declines in revenue 43% y/y and 16% y/y,
respectively. We highlight that, the decline in domestic CPO prices reflected
depressed global prices, as CPO supply continues to outweigh demand. While the
global crude palm oil (CPO) supply glut picture remains largely intact at the
time of writing, we note that CPO prices have recovered, rising by 8% q/q in Q1
19. The resurgence in CPO prices was, in part, driven by the reducing size of
the global supply glut. Elsewhere, global rubber prices have also picked up
significantly, benefiting from the proposed cartel-like “rubber export
restriction” by Thailand, Indonesia, and Malaysia (all of which account for
c.72% of global rubber supply). The impact of the foregoing, in our view, bodes
well for sector players’ margin.
CPO Volume Growth: A Play for Beyond
2019
On volume, we
highlight that unlike the previous quarter wherein healthy volume growth helped
limit price erosion passthrough to top-line, Nigerian palm oil producers
suffered a material decline in volume in Q1 19. This was as a result of the
prolonged election period which slowed field operations, with passthrough to
sales volumes. Looking ahead, while we see limited upside for volume growth
through the rest of the year, we expect higher prices to support top-line
growth over 2019E.
OKOMUOIL: Don’t Lose Sleep Over
2019
Among players,
we like OKOMUOIL due to its proven track record of delivering revenue growth
built around two key commodities – crude palm oil and rubber. While we
acknowledge that rubber is nearing an inflection point as the company plants an
additional c. 1,500 hectares this year, to fully exhaust total land area under
rubber plantation, we argue that its CPO operation is entering a new growth
phase with a total of 9,000 hectares of mature plantation coming onstream
between 2020E and 2021E. The impact of the foregoing should help double the
company’s volume over the next three years. Beyond the foregoing, OKOMUOIL is
well positioned to benefit from government policies including concessionary
loans from the CBN and BOI, absence of company income tax (CIT) on rubber
sales, and improved clampdown on illegal importation of CPO, which should
support domestic prices.
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