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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
1 www.unitedcapitalplcgroup.com
Nigeria Palm Oil Sector Update
Leveraging favourable policy?
Overview
Much ado about Palm oil?
Palm oil is of strategic importance as it is used in the production
of more than half of the products sold in supermarkets globally.
The continuous importance of Crude Palm Oil (CPO) for food,
biofuel and cosmetics purposes has led to uptick in its demand
universally. Palm oil remains the cheapest and most edible
vegetable oil globally. The oil palm tree produces 4.95 ton of
edible oil per hectare (ha), six times more than the rapeseed
tree, the next highest. In addition to its use as cooking oil, it is also
used in the manufacture of soaps and detergents, cosmetics,
pharmaceuticals, biscuits, biodiesel among others.
Outlook
We remain optimistic about the future of the Palm oil industry in
Nigeria as the key player continues to invest aggressively in
capacity expansion. For OKOMUOIL, we expect the c.9,000
hectares of mature plantation from its extension II to support
growth. Also, PRESCO expansion of its existing Palm Oil mill from
60 ton/hour to a 90 ton/hour milling plant by year-end 2020,
construction of a new 60 ton/hour Palm Oil mill in Sokoban estate
which is to be completed in 2023, and expansion of the
company’s palm kernel oil plant to 350 ton/day PKO plant
(current capacity: 60 ton/day) will support their topline growth.
Despite the recent rally in the stock market, we believe that the
key tickers in the Palm oil industry offer an opportunity for
investors to position. To further buttress our stand, valuation
multiples of Nigerian players trade at a discount to African and
Middle Eastern peers.
17th November, 2020
Research Analyst: Oluwashina Akinremi
+234-(0)706-6317-794 Oluwashina.akinremi@unitedcapitalplcgroup.com
Sector Risk Rating: Medium
Competitive Landscape:
Price Performance Chart
Equity Research | Sector Update
Sources: Bloomberg, United Capital Research
Sources: United Capital Research
0.70
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PRESCO NSE-ASI OKOMUOIL
Competitive
Rivalry
Power of
Buyers
Power of
Suppliers
Threat of
Subsistute
Threat of New
Entrant
Company P/E P/B EV/EBITDA
Okomu Oil Palm Plc 10.64 2.38 6.56
Presco Plc 9.36 1.52 5.72
Middle East and Africa Peer Average 38.89 1.08 9.69
PRESCO
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THOKOMU
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Table of Content
Global Overview ······································································································· 3 Global production: Still a growth story ······························································································ 3
Global consumption: Positively correlated with population ································································ 3
Key operator in global space…………………………………………………………………………………………….4
Global CPO pricing: Myriads of factors…………………………………………………………………………………..5
Palm Oil in Africa ······································································································ 5 West Africa remains the powerhouse ······························································································ 5
Key Players in Africa Palm oil market…………………………………………………………………………………….6
Nigerian Palm Oil Sector ···························································································· 7 The price of negligence ················································································································ 7
Palm oil demand: Production still lags demand ················································································ 9
Market structure: Okomu trading at premium...……………………………………………………………………… 9
Government policy: icing on the cake ··························································································· 10
Industry prospect, Comparative Analysis & valuation ················································· 10 Nigeria Palm Oil value chain and processing ·················································································· 10
Financial/ Comparative Analysis of key players ············································································ 12
Industry Valuation-Nigeria Companies well below peers ………………………………………………………….13
Company Analysis ………………………………………………………………………………………14 PRESCO Analysis-Light at the end of the tunnel ……………………………………………………………………...15
Okomu Oil: Smiling in Crisis ……………………………………………………………………………………………….18
Securities Trading
+234-1-280-7443 securities@unitedcapitalplcgroup.com
Asset Management +234-1-277-7511
Assetmanagement@unitedcapitalplcgroup.com
Trustees
+234-1-280-7275 Trustees@unitedcapitalplcgroup.com
Investment Banking
+234-1-280-7583 InvestmentBanking@unitedcapitalplcgroup.com
Research +234-1-2800-8125
research@unitedcapitalplcgroup.com
Contact Us
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Global Overview
Much ado about Palm oil?
Palm oil is of strategic importance as it is used in the production of more than half of the
products sold in supermarkets globally. The continuous importance of Crude Palm Oil
(CPO) for food, biofuel and cosmetics purposes has led to uptick in its demand
universally. Palm oil remains the cheapest and most edible vegetable oil globally. The oil
palm tree produces 4.95 ton of edible oil per hectare (ha), six times more than the
rapeseed tree, the next highest. In addition to its use as cooking oil, it is also used in the
manufacture of soaps and detergents, cosmetics, pharmaceuticals, biscuits, biodiesel
among others.
Global Production: Still a growth story…
Globally, demand for palm oil for food, cosmetics, and biofuel, remain robust with
Indonesia and Malaysia being the major exporters in the palm oil industry. According to
Orianresearch, global production of palm oil is expected to reach 72.95 million tons in
2022, at a CAGR (Compounded Annual Growth Rate) of 3.02% between 2017 and 2022.
The growth is expected to be buoyed by strong demand for the product from end-use
industries, increasing utilization of palm oil in food application, ascending consumption of
the product as a feedstock in biodiesel coupled with rising consumer awareness
regarding positive health benefits of palm oil are expected to be the prime drivers of
growth. Indonesia and Malaysia remain the largest production of palm oil accounting for
84.0% of global production.
Sources: Statista, United capital research Sources: USDA, United capital research
Palm oil is of strategic
importance as it is used
in the production of
more than half of the
products sold in
supermarkets globally
consumption of palm
oil tends to correlate
p o s i t i v e l y w i t h
population 0
5000
10000
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20000
25000
30000
Indonesia Malaysia Others Guatemala colombia Papua NewGuinea
Global palm oil top exporter (''000 MT), 2019
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Nigeria colombia Thailand Malaysia Indonesia
Top palm-oil producing countries, millions (metric tonnes)
2018
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Global Palm oil consumption: Positively correlated with population
The consumption of palm oil tends to correlate positively with population as eight out of
top ten consumers being the most populous countries in the world. Notably, Indonesia,
India, EU-27, and China accounted for over 70.0% of the world consumption. Also, the
worldwide market for Palm Oil is expected to grow at a CAGR of 5.3% over the next five
years.
Key Operators in Global Palm oil market– An Asian World
The rising demand for palm oil produces continue to pave ways for the players in the CPO
space. Most especially demand from the continent of Asia which currently stand above
80.0% of the total world consumption. Not surprising that Wilmar International Limited,
Demand from the
continent of Asia which
currently stand above
80.0% of the total world
consumption
Source: USDA, United Capital Research
Source: Bloomberg, United Capital Research
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500
1,000
1,500
2,000
2,500
3,000
3,500
Wilmar Int'l Ltd IOI Kuala Lumpur Sime Darby Golden Agri
Leading palm oil companies worldwide in 2018, based on
market capitalization Million (USD)
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2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Nig. remains only Africa country in top global consumers
Palm Oil Domestic Consumption by Country in 1000 MT
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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which is the leading palm oil production company in the world, in terms of market
capitalization, is based in the continent (Singapore to be precise).
Global Crude Palm Oil Pricing- Myriads of factors
CPO price is driven by several factors, chiefs among which are supply and demand of
palm oil, price of competing vegetable oils, weather patterns, import policies of importing
countries and changes in taxation and import policies. The global CPO price which has
been on the rise since 2005, received a great blow in 2007 due to the global financial
crisis which melt down the global economy. Hence, it saw a decline of 17.3% between
2006 and 2008. Also, the demand from China and India (which accounted for c.36% of
global palm oil imports) declined significantly.
Overview of Palm oil in Africa
West Africa remains powerhouse
The African oil palm originated in West Africa and has grown extensively in this region. The
oil palm traditionally known to catered for the rural populations in West Africa with supply
of vegetable fat and oil, palm wine and some regionally important non-wood forest
products. Palm oil has grown from being a subsistence crop in small-scale farming systems
to a large-scale palm oil production. As the demand for palm oil in West Africa begin to
rise, investors begins to see prospects in that line as companies with existing plantations
looking to expand their operations into west Africa in order to take advantage of the
growing demand for palm oil with smallholders currently account for 70–90% of African oil
palm growers.
Source: Bloomberg, United Capital Research
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Price movement of crude palm oil price in 20yearsCPO still above 10years average amid Covid-19
Palm Oil Price 10Yrs Average
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Looking at the production side, Nigeria remains the top palm oil producer in Africa based
on the data by USDA above, despite Nigeria being the largest producer of palm oil in
Africa, Cote Divoire remains the largest exporter of the commodity, with Nigeria settled at
the sixth position on the list of palm oil exporting countries in Africa.
Key players in Africa palm oil market
The palm oil market in Africa has been majorly denominated by foreign companies outside
the continent either through direct foreign investment or acquiring an existing indigenous
firm. Some of these players are:
Source: USDA, United capital research
Source: USDA, United capital research
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400
600
800
1,000
1,200
Top palm-oil producing countries (MT'000), 2020
Nigeria remains top producer in Africa
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CoteDívoire
Benin Kenya Ghana Togo Nigeria Egypt Tanzana CongoDRC
Largest exporter of palm oil in Africa, 2020Cote Di'voire top export chat in Africa (MT'000)
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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• WILMAR
The Singapore-listed agri-business owns oil palm estates in Uganda and West Africa via joint
ventures with a total planted area of about 6,000 hectares and 39,000 hectares. The joint
ventures also manage nearby smallholders’ schemes in these areas. Wilmar recently started
buying shares in Ghana’s Benso Oil Palm Plantation in a takeover bid from Unilever Ghana.
• Sime Darby
Sime Darby is the world’s largest listed planter by land holdings, with a 220,000-hectare
concession in Liberia in a 2009 deal.
• Quifel
Brazilian agriculture operator Quifel runs farms in Mozambique, Sierra Leone, and Angola. The
firm has 40,000 hectares of land for oil palms, sugar, and rice
• Fri-El Green
The Italian green fuels firm signed a 30-year deal with the Republic of Congo to take over
40,000 hectares of oil palms in 2008. The deal includes taking over two state-owned planters.
The firm took over a dormant oil palm estate in Nigeria in 2007 that came with a concession
of over 11,000 hectares with rights to extend land to 100,000 hectares
The Nigerian Palm Oil Sector
The price for negligence
Nigeria controlled 45.2% of world palm oil production in 1961, exported 167.2 metric tons,
representing 26.6% of total world palm oil export to lead the likes of Malaysia and Indonesia.
However, underinvestment and years of neglect has seen the industry production decline to
a point where the country is now a net importer of what it used to have in excess , as
Indonesia and Malaysia displaced Nigeria due to their continuous investment in research
and development leading to higher varieties and ultimately higher output.
Several factors, ranging from poor infrastructure to inadequate finance, poor access to
fertilizer, land tenure system and low crop yields as well as invasion of cheaper imports are
responsible for lagging of Nigeria palm oil industry. The deficiency of supportive infrastructural
facilities such as access road to some of the plantation and inadequate technology for
optimum extraction from the fruits, leads to wastage as a lot of oil is left un-extracted from
the pulp.
Nigeria controlled
45.2% of world palm oil
production in 1961,
exported 167.2 metric
tons, representing
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Food and Non-food uses of Palm oil
Palm oil is used in Nigeria for food and non-food consumption. Basically, four palm oil
products are marketed in Nigeria:
• The low quality Oil known as Technical Palm Oil (TPO), which is sold as unprocessed oil
for traditional use, meaning essentially consumed by household;.
• The high quality called Special Palm Oil produced by large mills and used by industries,
usually refined.
• The Palm Kernel Oil derived from the kernel of the fruit and used by industries.
• The Refined Bleached Deodorized Oil (RBD), which is a refined oil from which colours
and smells are removed.
Sources: USDA, United Capital Research
Sources: PIND, United Capital Research
Food Uses Non-food uses
Cooking Oil Cosmetics and personal cares
Deep Frying Oils Soaps
Margarines and spreads Leather
Bakery fats Pharmeceuticals
Cocoa butter alternative fats Lubrications and Grease
Confectionary fats leather
Ice cream fats Industrial Chemicals
Infants nutrition fats Biodiesel
Food and non-foos uaes of palm oil products
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Palm Oil demand: Production still lags demand
According to the World Bank, Nigeria is the largest consumer of palm oil in Africa given its huge population. In 2018,
Nigeria consumed c. 3.0mn metric tons (MT) of fats and oils, with palm oil accounting for 44.7% (1.34mn MT). In the same
period, palm oil production stood at 1.02mn MT, resulting to a supply shortfall of 0.32mn MT. Thus, indicating opportunities
for local production expansions. In a bid to increase local production, the federal government through the independent
CBN included palm oil as part of the prohibited items for FX auctions in Nigeria.
Further, lack of access to finance by most of the smallholder farmers inhibits their ability to improve their inputs, just as
unstable nature of electricity supply in the country also translate into higher costs of production for farmers as millers,
putting them at disadvantage to compete with cheaper imports. Even though 3mn hectare was cultivated, in 2014, only
910,000 tons was produced, due to cultivation of low yield crop.
Nigeria Palm oil market structure: Okomu oil trading at premium The Nigerian Palm Oil market can be said to be an oligopolistic in nature with two players largely dominating the scene.
PRESCO has established itself as the stronger player by constantly outperforming its major competitor (OKOMU) revenue
wise in the last six years. However, using market capitalization as a proxy, OKOMU appears to be trading at premium to
PRESCO by wielding c.61.0% of the total market share leaving PRESCO to c.39.0%
Sources: USDA, United Capital Research
7.0
10.0
13.0
16.0
19.0
22.0
25.0
2014 2015 2016 2017 2018 2019
Presco constantly outperfrom Okomu, revenue as proxy (N'bn)
OKOMU PRESCO
Sources: Companies Financials , United Capital Research
61%
39%
Oligopolistic market with a clear leaderOkomu trading at premium
Okomu Presco
Sources: Bloomberg, United Capital Research
Sources: USDA, United Capital Research
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Government policy: Icing on the cake
The policy of the federal government policies has been favourable to the sector. Policy such as; 35% levy on imported
palm oil, import ban on refined oil, the exclusion of palm oil and related products from sourcing dollars from the official FX
market and the border closure since August 2019, have been supportive for the oil palm sector. However, considering the
volatility in government policy due to change of government, there is a medium to long term downside risk of policy
reversal.
Industry prospect, Comparative Analysis & valuation
Nigeria Palm Oil value chain and processing The palm oil value chain is composed of a wide range of players belonging to different channels depending on the
production technique and type of oil. Notably, palm oil is majorly produced in South Nigeria and marketed in all other
parts of the country. The major functions in the value chain process are production, primary processing, secondary
processing, wholesale and retailing.
• PRODUCTION
Production of palm oil is carried out in various production systems, some of which include: Small / medium and large
1. scale farms: the acreages of this category are between 1 and 25 hectares. The variety planted is mostly Tenera.
Small scale farms are mainly informal and palm oil is processed at family or community level, so the use of manual
processing is common. Production is dominated by traditional techniques. The medium and large-scale farms tend to
use improved processing technologies and are adopting new techniques to improve marketing.
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2. Wild-groves Farmers: this production system involve renting trees from the landowners and the yields for
this type of production are very low, which makes it the least productive channel.
3. Estates: The Special Palm Oil (less or equal to 5% Free Fatty Acid) is mostly produced by estates. They
can provide high quality crude palm oil to the secondary processors. Some estates are still owned by
the State. The small estates are owned by individuals or cooperatives. The medium estates belong to
corporations or to the State and some of the large estates are integrating into large scale processing.
• PROCESSING
According to the method used, the levels of oil extraction varies widely. Indeed, in the traditional channel,
most of the palm oil is produced by women using manual traditional methods namely mortar and pestle.
Oil extracted usually reaches only 25% of the available oil in the fruit. Some small farmers use mini–
improved processing units which are semi-mechanized. The medium scale processors process the fruit with
a screening machine, boiler, digester, press, clarifier and generator. They employ around 10 persons to
operate. The large-scale processors attached to the estate mills offer high yields of 75% oil extracted of the
available oil.
• SECONDARY PROCESSING
Special Palm Oil (SPO) and Palm Kernel Oil (PKO) are the main inputs for secondary processing. The SPO
production is not enough to match the refined company capacities as it is able to supply less than 50% for
production. As a result, some companies source palm oil internationally through imports
• RETAILING Retail
These can take place in roadsides, local/periodic market centers and stands as well as wholesale. Each retail
point is characterized by activities of trading associations, consequently the retail market is restricted as it
does not allow free entry into the business. Indeed, distributors must be registered by paying a large
amount of money to the associations. The members fix the price of palm oil.
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Financial/ Comparative Analysis of key players at Glance
Sources: Companies Financials , United Capital Research Sources: Companies Financials , United Capital Research
Sources: Companies Financials , United Capital Research Sources: Companies Financials , United Capital Research
Sources: Companies Financials , United Capital Research Sources: Companies Financials , United Capital Research
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Industry Valuation-Nigeria Companies well below peers
Sources: Companies Financials , United Capital Research Sources: Companies Financials , United Capital Research
Sources: Bloomberg, United Capital Research
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Companies
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Presco Plc
In need of balance sheet optimization
Topline Analysis: Impressive topline
The performance of PRESCO 9M-2020 result was quite an impressive
one as the macro economic environment bolstered by (Border
closure, FX scarcity and favourable government policy) continue to
support the business growth. Hence, revenue increased by 24.5%y/y
to N18.9bn. We understand that the bulk of firm’s revenue comes
from the sales of refinsed CPO. The company does not really
concentrate on the sales of CPO. Going forward we expect to see
continued improvement in the topline of PRESCO has the company
recently concluded plans to diversify the business in a bid to play in
the rubber and cocoa markets. We see this move as a positive
development for revenue, considering as we believe that it will helps
the broader base for revenue. The move also presents an opportunity
for forex earnings. According to the management, the rubber
production will be 100% exported.
Operating Margin: Resilient amid cost increase Cost of sales increased by 19.9% to N7.0bn. However, a faster
increase in revenue was able to compensate for the cost of sales
increase. Hence, the gross profit jumped 27.3% to N11.9bn. Also,
finance cost declined by 7.6% to N1.2bn. Hence, the profit before
and after tax improved by 51.0% and 56.4% to N6.6bn and N5.0bn,
respectively.
Balance sheet analysis: Anything to cheer?
PRESCO continues to invest heavily in long-term assets as evident by
the over 100% increase in borrowing to N26.3bn. Some of the
investment include expansion of its existing Palm Oil mill from 60 ton/
hour to a 90 ton/hour milling plant by year-end 2020, Construction of
a new 60 ton/hour Palm Oil mill in Sakponba Estate to be completed
in 2023, expansion of the company’s palm kernel oil plant to 350 ton/
day PKO plant (current capacity: 60 ton/day). Notably, Cash and
cash equivalents fell 40.5%y/y to N3.5bn, following a N6.5bn loan
repayment made during the year. However, Borrowing via overdraft
(OD) rose from N7.1bn to N8.0bn, accounting for 36% of all interest
17th November, 2020
Research Analyst: Oluwashina Akinremi
+234-(0)706-6317-794 Oluwashina.akinremi@unitedcapitalplcgroup.com
Risk Rating: High
Key Data
Price Performance Chart
Stock Rating HOLD
Target Price
Old N57.0
New N81.5
Expected Return 2.2%
Equity Research | Earnings Update
Last Price (₦) 60.5
52 week High/Low (₦) 60.5/31.3
1M Price Change (%) 23.5
3M Price Change (%) 33.7
6M Price Change (%) 66
YTD Change (%) 27.4
Beta 0.85
Market Capitalization (₦’m) 60,500.00
Market Capitalization ($’m) 156.90
Shares Outstanding. (Units’bn) 1
Float (%) 39.9
Dividend Yield (%) 3.4
Note: Refer to appendix for complete description of risk rating
Sources: Bloomberg, United Capital Research
0.70
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0.90
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PRESCO NSE-ASI
PRESCO
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Presco Plc: In need of balance sheet optimization
bearing liabilities. Further analysis indicated that average cost of OD in the books of the
firm is estimated at c.12.0%. For balance sheet optimization purpose, we think PRESCO
should consider taking advantage of the low yield environment in the debt market by
registering a commercial paper to refinance and average down it’s cost of capital. For
context, PRESCO would have saved close to 50% of its finance expense attributable to
OD if the said N8.0bn was raised in the debt capital market.
Outlook: HOLD rating maintained
The future looks bright as the company continue to invest aggressively in CAPEX. Apart
from some of the planned capacity expansion project on-going for 2020, management
also guided on the plan to invest c. N34.0bn in CAPEX for the next five years. This is
expected to be financed via internally generated funds and external borrowings. In
addition, we expect the recent diversification into rubber and cocoa to support the
topline coupled with favorable government policy towards the sector. Accordingly, we
have estimated a Revenue growth of 23.7%y/y to N24.6bn in FY-2020E. We expect a mild
decline in Cost of Sales growth; hence, gross margin is expected to be strengthen. Also,
we have estimated a mild decline in OPEX as the company is expected to improves effort
to drive cost efficiency. In all, we expect the surge in PBT and PAT to be sustained, fueled
by lower base effect of the 2019 performance. PRESCO currently trades at a forward EV/
EBITDA of 5,7x, which is below both the local and EM peers average of 6.14x and 9.7x,
respectively; implying that the ticker is currently undervalued. Putting the above together
and factoring the current market volatilities, we update our risk free rate and equity risk
premium to reflect the current realities. Hence, we revised our TP to N81.5.0/share with a
potential upside of 2.2%.
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Presco Plc: In need of balance sheet optimization
Securities Trading
+234-1-280-7443 securities@unitedcapitalplcgroup.com
Asset Management
+234-1-277-7511 Assetmanage-
ment@unitedcapitalplcgroup.com
Trustees
+234-1-280-7275 Trustees@unitedcapitalplcgroup.com
Investment Banking
+234-1-280-7583 InvestmentBank-
ing@unitedcapitalplcgroup.com
Financial Highlights (N'Mn)
Sources: Company Financials, United Capital Research
Contact Us
Headlines 9M- 2019 9M- 2020 FY-2020E
Revenue 15,197 18,917 24,594
Cost of sales -5,837 -7,000 -6,553
Gross Profit 9,360 11,917 18,041
Operating expenses -3,884 -4,125 -5,448
Other income 200 5 8
Finance cost -1,320 -1,220 -1,994
Profit/Loss Before Tax 4,356 6,577 9,942
Taxation -1,139 -1,547 -2,162
Profit/Loss After Tax 3,217 5,030 7,780
FY- 2019 9M- 2020 FY-2020E
Cash and cash equivalents 5,935 3,534 4,716
Trade & Other Receivables 6,832 5,945 5,759
Trade & Other Payables 8,181 6,627 7,616
Borrowings 31,554 26,315 28,512
Total Assets 71,010 69,111 70,229
Net Assets 27,888 30,918 33,343
Operating Margin -25.6% -21.8% -22.2%
Net Margin 21.2% 26.6% 31.6%
Leverage (Debt/ Equity) 113.1% 85.1% 85.5%
Price(N) 65.9 74.0
EPS(N) 5.0 7.3
BVPS(N) 30.9 33.3
P/E(x) 13.1 10.1
P/BV(x) 2.1 2.2
ROAE 17.1% 17.9%
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Okomu Oil Plc
Brighter days ahead
Topline Analysis: CPO production expansion spur Revenue
growth
OKOMUOIL revenue for 9M-2020 jumped 19.8%y/y to N18.6bn. The
increase was fueled by the continuous closure of land border which
has reduced the activities smuggler of lower CPO, FX scarcity which
has curtailed imports and creates an avenue for local players to
increase CPO prices and also drive volume in a bid to meet the
growing demand in the country. Notably, the Q3-2020 standalone
revenue saw a decline of 27.0% to N5.1bn, this was due to the high
base effect of the corresponding quarter in 2019. Analysing the 9M
revenue further, we observed that the growth was buoyed by local
sales as revenue from domestic sales grew 27.4%y/y to 16.7bn while
the export sales (rubber) declined by 20.4%y/y to 2.0bn, WSe
attributed the decline in rubber sales to the combination of lower
rubber prices and volumes. On volume, it was clear that OKOMU’s
rubber production maxed out in 2019 as the company planted an
additional c.1,500 hectares, to fully exhaust its total land area for
rubber plantation. Hence, we expect rubber production to remain
tepid in the near term.
Cost of sales Analysis: Cost reduction buoyed gross margin
The cost of sales declined 2.5%y/y to settle at N2.2bn. A deeper look
at the cost of sales revealed that CPO cost of sale increased by 3.7%
to 1.9bn, while rubber cost saw a significant decline of 32.7% to
0.02bn. The cost of sales saw a huge decline in H1-2020 which was
due to the harvest season of company which always make the
company to incur lower cost in first half of the year. While the Q3-2020
cost of sales saw a spike of 104.8% to N1.1bn. However, the huge
decline in cost of sales in H1-202 was still able to relief the pressure on
gross profit. The gross profit increased by 23.5%y/y to N16.5bn.
Notably, the finance cost skyrocketed by 109.4%y/y to 0.5bn amid a
significant decline in finance income by 97.2%y/y to N0.01bn.
17th November, 2020
Research Analyst: Oluwashina Akinremi
+234-(0)706-6317-794 Oluwashina.akinremi@unitedcapitalplcgroup.com
Risk Rating: High
Key Data
Price Performance Chart
Stock Rating BUY
Target Price
Old N85.0
New N88.0
Expected Return 10.0%
Equity Research | Earnings Update
Last Price (₦) 80.0
52 week High/Low (₦) 80/49.5
1M Price Change (%) 2.6
3M Price Change (%) 13.5
6M Price Change (%) 45.3
YTD Change (%) 43.9
Beta 0.6
Market Capitalization (₦’m) 76,312.80
Market Capitalization ($’m) 197.90
Shares Outstanding. (Units’bn) 0.95
Float (%) 94.6
Dividend Yield (%) 2.3
Note: Refer to appendix for complete description of risk rating
Sources: Bloomberg, United Capital Research
OKOMU
0
5
10
15
20
25
30
0 5 10 15 20 25 30
Ea
rnin
gs
Vo
latilit
y (
%)
Price Volatility (%)
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
NSE-ASI OKOMUOIL
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Okomu Oil Plc: Brighter days ahead
Balance Sheet Analysis
To further give context to the impressive performance of OKOMU, the company reported
a 89.5%y/y spike in Cash & Cash Equivalence to N5.1bn. Borrowings grew by 33.6% to
N11.0bn, this clearly speak to the surge seen in finance cost as highlighted above. Worthy
of mention, total assets surged by 13.5%y/y to N49.5bn, net asset trailed same path to
record a growth of 7.2%y/y to N31.3bn.
Outlook: Brighter days ahead
For the rest of 2020, we are positive about the company and we expect growth in
revenue to be fueled by continued volume growth as the firm continue to leverage in its
strong brand to push more to the market coupled with ongoing FX scarcity that will
discourage import. Hence, we forecast revenue growth of 23.7% y/y to N23.3bn. Notably,
our growth in revenue is expected to be driven by CPO volume growth. This is further
supported by the c.9,000 hectares of mature plantation from its extension II highlighted
above. Also, we expect Cost of Sales growth to come lower compare to revenue growth,
hence, gross margin is expected to be strengthen. OKOMUOIL currently trades at a
forward EV/EBITDA of 6.6x, which is well below EM peers average of 9.6x. Putting the
above together, we revised our valuation assumption at 12M-TP of N88.0/share with a
potential upside of 10.0% when compared to the current price of N80.0/share.
Securities Trading
+234-1-280-7443
securities@unitedcapitalplcgroup.com
Asset Management
+234-1-277-7511
Assetmanage-ment@unitedcapitalplcgroup.com
Trustees
+234-1-280-7275
Trustees@unitedcapitalplcgroup.com
Investment Banking
+234-1-280-7583
InvestmentBank-ing@unitedcapitalplcgroup.com Sources: Company Financials, United Capital Research
Contact Us
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Nigeria Palm Oil Sector Update: Leveraging favourable policy?
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Okomu Oil Plc: Brighter days ahead
Securities Trading
+234-1-280-7443
securities@unitedcapitalplcgroup.com
Asset Management
+234-1-277-7511
Assetmanage-ment@unitedcapitalplcgroup.com
Trustees
+234-1-280-7275
Trustees@unitedcapitalplcgroup.com
Investment Banking
+234-1-280-7583
InvestmentBank-ing@unitedcapitalplcgroup.com
Financial Highlights (N'Mn)
Sources: Company Financials, United Capital Research
Contact Us
Headlines 9M- 2019 9M- 2020 FY-202E
Net Revenue 15,543 18,620 24,339
Cost of sales -2,215 -2,159 -3,599
Gross Income 13,328 16,461 20,740
Operating expenses -7,395 -9,203 -10,945
Finance Income 381 11 15
Finance cost -215 -450 -550
Profit/Loss Before Tax 6,100 6,819 9,260
Taxation -1,987 -1,820 -2,071
Profit/Loss After Tax 4,112 4,999 7,189
FY-2019 9M- 2020 FY-202E
Cash and cash equivalents 2,684 5,086 2,787
Trade & Other Receivables 5,053 4,520 5,764
Trade & Other Payables 3,531 4,483 4,524
Borrowings 8,264 11,039 13,652
Total Assets 43,596 50,449 52,906
Net Assets 29,180 32,271 45,009
Gross Margin 85.7% 88.4% 85.2%
Net Margin 26.5% 26.8% 29.5%
Cost to Sales 14.3% 11.6% 14.8%
Leverage (Debt/Equity) 28.3% 34.2% 30.3%
Price(N) 80.0 88.0
Trailing 12M EPS(N) 6.2 7.5
BVPS(N) 33.8 47.2
P/E(X) 12.9 11.7
P/BV 2.4 1.9
ROAE 19.3% 19.4%
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Disclosure
Appendix
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Investment Rating Criteria and Disclosure
United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;
Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR
of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.
Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor
around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%).
Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero.
NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking
relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.
Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.
Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in
activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s
Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published
research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable conflicts of interest that may arise in the course of its business relationships.
Risk Rating
Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in
significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk. Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from
government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets. Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.
These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest, government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.
United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem
applicable the company of focus. The ratings are defined below;
High: High probability of an imminent systematic risk or/and unsystematic risk
Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk
Low: Low probability of an imminent systematic risk or/and unsystematic risk
Analyst Certification
The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this
report.
2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report.
Other Disclosures
United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,
potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report are disclosed: • UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report
Disclosure keys
a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence
on the company’s operating decision directly or through proxy arrangements
c. UCAP is a market maker in the publicly traded equities of the Company d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company
e. UCAP beneficially own 1% or more of the equity securities of the Company f. UCAP holds a major interest in the debt of the Company
g. UCAP has received compensation for investment banking activities from the Company within the last 12 months h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months
i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution
j. The Company is a client of UCAP k. The Company owns more than 5% of the issued share capital of UCAP
Disclaimer United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets
and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)
nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell
securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is
registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact
United Capital Plc, 12th Floor, UBA House, 57 Marina, Lagos. ©United Capital Plc 2018.*
Disclosure Appendix
Company Disclosure Dangote Cement Plc g,h Flour Mills of Nigeria Plc g,h FCMB Plc h Fidelity Bank Plc g,h Forte Oil Plc g,h Stanbic IBTC Plc h PZ Nigeria Plc h
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