Market Intelligence

Negative outlook for palm oil producers could dampen stocks


February 19, 2018 | 1:32 am
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A worker holds harvested oil palm fruit for a photograph at the PT Perkebunan Nusantara plantation and production factory in Kertajaya, Banten Province, Indonesia, on Monday, June 20, 2011. PT Perkebunan Nusantara VIII is a state owned palm fruit plantation and palm oil factory. Photographer: Dadang Tri/Bloomberg via Getty Images

Palm oil producers were the darling of the Nigerian bourse last year as government policies was responsible for a robust earnings growth that attracted investors to their shares.

However, another policy is seen to be haunting future revenue of these firms. In other words, investors could lose appetite for stocks since future revenue could take a beating.
“There is no need buying their stocks when revenues down,” said Ayodeji Ebo, managing director and CEO of Afrinvest Limited.
The introduction of the Investors’ and Exporters’ (I & E) window by the apex bank is a curse for palm oil producers because importers now have access to foreign exchange to import the product, contributing to a supply glut.

“There’s a surge of illegal shipments from neighbouring West African countries in recent months contributing to oversupply of the domestic market,” said Graham Hefer, Chief Executive Officer, Okomu Oil Nigeria Plc.
“There are fears the situation may get worse if the government gives import waivers ‘to some people for political reasons’ ahead of 2019 general elections, as happened in the past, he said.

In 2015, Central Bank of Nigeria (CBN) stopped the importers of palm oil from accessing the official foreign exchange market. The policy was a boon for these firms as competitors were forced to buy products from them and the aftermath was a growth in earnings and share appreciation.

The cumulative revenues of the two largest palm oil producers in Africa’s largest economy—Okomu and Presco—spiked by 48.08 percent to N29.31 billion in December 2017 from N19.80 billion as at December 2016.
Combined net income of the two firms surged by 422.17 percent to N26.84 billion in December 2017 from N5.14 billion as at December 2016.
Cumulative net profit margin, a measure of efficiency, surged to 91.54 percent in December 2017 from 25.95 billion as at December 2016.
But negative outlook for the sector on the back of a supply glut could result in margin compression as future sales may not absorb operating costs.
Investors are paying up for the two firms as they consider both firms as growth stock and well positioned to tap into Nigeria growing population that crave for consumption.
Okomu currently sports a trailing twelve months (ttm) price to sales ratio of 3.42x on sales while Presco has a price to sales of 3.38x sales.
Presco, the largest palm oil producer says a new acquisition of 14,400 Ha and another 2,500Ha in Orhiomwon local government area of Edo state has added to the company’s land bank.
Okomu and Presco shares have gained 6.37 percent and 2.19 percent since the start of the year but underperforming the 12.11 percent of the Nigerian Stock Exchange All Share Index (ASI).



February 19, 2018 | 1:32 am
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