Palm oil prices reached record highs in 2022, driven primarily by the disruption in the sunflower oil market caused by the Russia-Ukraine war and export restrictions imposed by the Indonesian government. Nigeria, though the fifth-largest producer of palm oil in the world, remains a net importer of the vegetable fat. Given that palm oil is widely used in cooking and manufacturing consumer food products in Nigeria, high prices have stoked consumer inflation and pushed the government to encourage local producers to meet the supply gap. While most of the palm oil is sourced from small farmers supplying to the local market, large producers, such as Presco and Okomu, are well placed to benefit from government support, strong international demand, and high prices.
Current local production is insufficient to meet domestic demand
Nigeria depends on palm oil imports from Southeast Asia, importing c.25% of palm oil consumed in recent years. Nigeria’s government is trying to reduce this supply shortfall and save valuable foreign exchange. Improved availability of palm oil will also likely encourage the expansion of the packaged food industry in Nigeria, providing a boost to the local economy. In addition, a historical preference for palm oil in cooking, a growing population and low per capita consumption of edible oils provide additional impetus for local production growth.
Palm oil should benefit from the government’s focus on export diversification
Nigeria is the largest economy by GDP and the most populous country in Africa. Despite being the largest consumer of palm oil in Africa in aggregate, the per capita consumption of edible oil remains relatively low. Focus on agricultural products, such as palm oil, gradually declined after the discovery of crude oil in the late 1950s, resulting in the current Nigerian export basket being dominated (c.90% of total exports) by crude oil and petroleum products. The Nigerian government aims to correct this dependence on oil exports. Palm oil is a key agricultural product where the country has the capability to restore its status as a global exporter. To support
local producers, the Nigerian government has introduced tariffs on palm oil imports and is lending financial support to local producers.
Prices have been volatile recently, but should benefit from the expected strong demand over the long term
Owing to global vegetable oil shortages, due to the disruption in sunflower oil supplies caused by the Russia-Ukraine war, Indonesia banned palm oil exports in April to secure supplies for its domestic market and control inflation. This resulted in record high prices which, in turn, dampened trade volumes. Prices corrected quickly in June as Indonesia incentivised exports in line with rise in domestic inventories.
While recent price declines will likely dampen enthusiasm for investment in palm oil, prices remain relatively high and are expected to remain above pre-COVID 19 levels in the long term, due to strong demand.
Presco’s operational efficiency has shone through in recent years, but high debt levels are a concern
Presco owns four large oil palm estates covering 39,500 hectares (including the recently announced Siat Nigeria Ltd acquisition), as well as palm oil processing, refining and storage capacities. In recent years, revenue and profitability benefited from growth in FFB production, high Crude Palm Oil (CPO) market prices and efficiencies of scale. That said, Presco’s leverage more than doubled to 4.7x in 2021 from 2.1x in 2017, increasing the company’s exposure to market risks amid growing inflation and higher benchmark interest rates. We believe management needs to raise additional capital through a rights issue or from majority shareholder, SIAT SA, to reduce debt levels.
Okomu’s dual-product strategy provides steady growth, but global slowdown could impact demand and pricing
Okomu follows a dual-product strategy, with 85% of revenue derived from palm oil products and 15% from rubber products. Plantation area included about 19,000 hectares (ha) of oil palm and about 7,300ha of rubber at end-2021. In addition, Okomu operates palm oil mills and supplies all its CPO to the domestic market. The company has benefited from recent high palm oil prices. In our view, the company should be able to meet its long-term debt obligations through regular cash flow. Expansion plans include adding mill capacity and sourcing FFBs from small farmers to enhance its CPO plantation base.
Presco and Okomu provide upside potential at current levels
We derive our fair values of both Presco and Okomu using a 50:50 weighted average of relative valuation and discounted cash flow (DCF) valuation methods. Our relative valuation is based on average 2023e EV/EBITDA multiple of 7.2x of the selected few Malaysian and Indonesian peers (see figure 26 below). Presco (6.1x) and Okomu (6.5x) traded at a discount of 15% and 10% compared to the peer average. Using equal-weighted RV and DCF values, we arrived at a fair value of N219/share and N232/share for Presco and Okomu, respectively. Our base case predicted an upside potential of 38% and 7% to the current market prices of Presco and Okomu,
respectively
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
