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Tuesday, March 28, 2023

Government Policies Underpin Oil Palm Firms’ Earnings 

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Oil palm producers are an enormous beneficiary of the government policies over the last six years as the president Muhammadu Buhari’s administration is steadfast to ensuring that the country attains sufficiency in food.

In 2015, the central bank stopped importers of 41 items, including oil palm and textile from accessing official foreign exchange markets, that policy was a boon for operators in the industry.

Four year after, the border closure imposed by the government to curb influx of cheap and substandard products was a blessing in disguise

Of course, the policy has positively impacted the earnings performance of Okomu Oil Plc and Presco Oil Palm Plc, the two largest oil palm producers in the country.

Some investors see these firms as value stocks that deliver consistent earnings growth and dividend even amid an economic downturn.

Presco and Okomu outperformed the broader market in 2020 and they have remained profitable despite the ups and downs of the economy and underlying tough operating environment.  

Interestingly, both recorded fastest profit expansion among the NGX 30 firms (lists of the most liquid and capitalized companies in the country), a rare feat for a sector that had been neglected by past leaders.

For the first three month through March 2021, OKomu’s net income surged by 159.90 percent to N5.27 billion from N2.02 billion the previous year.

Similarly, Presco’s net income surged by 113.50 percent to N3.84 billion in March 2021 from N1.80 billion as at March 2020.

It is noteworthy that investors who have not bought into these stocks are gradually being left behind by the train as these firms have strong margin expansions; that means they are efficient in turning each Naira invested in sales by shareholders into higher profit. Also, they have been able to translate top line impressive performance (sales) into bottom line growth (profit).

Okomu’s net margins increased to 41.98 percent in March 2021 from 29.03 percent in March 2020.Put in another way, for each N1 of revenue Okomu earns, No.41 is in net profit.

Also, Presco’s net margins increased to 48.48 percent in the period under review from 33.49 percent the previous year.

The stellar performance of Crude Palm Oil (CPO) makers can also be attributed to improved domestic price of refined palm oil compared to the previous year, and as the companies were able to push out more volumes.

Of course, the coronavirus pandemic elicited the lockdown of economies across the globe and had devastating effects on commodity prices, rubber prices were spared the pang of the disruption.

However, there was a remarkable twist in June last year as the price of CPO rallied due to supply disruption in Indonesia and Malaysia, the two world’s largest producers of the commodities.

Analysts at Cordros Capital in a note to clients said going into 2021 they expect CPO prices to remain high, especially in the first half of the year, and higher rubber price, especially towards the second half of the year. 

The World Bank estimates CPO price at USD723.00/mt and rubber at USD1.68/kg.

“On CPO, the price forecast is primarily hinged on expected tight supply from heavyweights, Indonesia and Malaysia, as labour constraints and ageing palm tree profiles impact fresh fruit bunches (FFB) yields, according to analysts at the research house,” said analyst at Cordros Capital.  

“Also, the effects of the La Nina weather pattern will subdue global supply in the first quarter of 2021, following the disruptive impact on CPO producing countries in Southeast Asia,” the analysts.

 Okomu offers investors a high return for investing in it as it has a dividend yield of 7.25 percent. The company has a price to earnings ratios of 11.20 times and share price of N96.50, valuing it at N92.05 billion.

Presco’s shares are trading at 14.42 times earnings while its share price closed at N40.80, valuing it at N75.90 billion.

 The downside risk to the earnings of Okomu and Presco is the reopening of the land borders that will reignite competition and price erosion.

Nonetheless, higher CPO prices will continue to add impetus to earnings and the government may formulate policies that will unlock the potentials in the industry.

In the early 60s, Nigeria was the largest producer of palm oil with a global market share of 43 percent as Malaysia and Indonesia were playing catch up.

However, the discovery of crude oil (black gold) was a curse to Nigeria as the government neglected the sector and a lot of people were l jettisoning Agric for white collar jobs in the city.

Today, it is the 5th largest producer with less than 2 percent of total global market production of 74.08 million MT; interestingly, Malaysia and Indonesia have surpassed Nigeria as the largest producer of the commodity as both control 80 percent of global total output.

Global accounting body PWC quoted the Central Bank of Nigeria (CBN) as saying that if Nigeria had maintained its market dominance in the palm oil industry, the country would have been earning approximately $20 billion annually from cultivation and processing of palm oil as at today.

In addition, it loses over N90 billion yearly, and in the next three years will lose not less than N270 billion to deficit and importation of palm oil, according to investigations by The Guardian Newspaper.

Analysts at PWC added that in 1965, the World Bank injected nearly $2 billion into over 45 projects in Southeast Asia, Africa, and parts of Latin America to support the growth of the palm oil industry.

“Indonesia received $618.8 million, which was the highest funding. Nigeria received the second highest funding of US$451.5 million followed by Malaysia with US$383.5 million in project funding,” said analysts at PWC.

From October 2019 to September 2020, the palm oil consumption in Nigeria was estimated to reach 1.4 million metric tons, according to data from the United States Department for Agriculture (USAID).  

“The domestic consumption of palm oil in the country constantly grew in the past years,” said the report.

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