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Call Memo - Nigeria Palm Oil Sector. (Okomuoil & Presco)

• Consequent to the release of The Okomu Oil Palm Plc audited FY 18 results and the expectation of the full year 2018 audited FY 18 results for Presco Plc, we paid a visit to the two companies in Edo state. There we met with management of both companies to get insight into the outlook of both firms over the medium term. We also embarked on a factory and Palm plantation tour to get firsthand information about the progress of their expansion plans. See below discussion highlights.

     The Okomu Oil Palm Plc

• Palm oil Mill expansion to 105 ton/ hour in 2021: From our discussion with management, out of the 7,983 hectares planted so far in extension 2 plantation, the first batch of harvest (3800 hectares) is due to come in this year, but management guided to preserving its harvest in order to reap better yields next year. Management also plans to expand its existing plant in Okomu1 plantation by 15 tons/hour. In addition, to fully cater for additional FFBs from its extension 2 plantation, Management has started the civil work for the construction of a new 60 ton/hour oil mill on a 400 by 260 meters land area at its extension 2 plantation. However, management plans to commission only 30 ton/ hour mill in January 2021, while it plans to set up another 30 ton/ hour mill in 2023.
• Expansion in turbine to 5MW in 2020: In a bid to reduce its cost of energy and avoid the persistent energy issues associated with the Benin Electricity Distribution Company (BEDC), management has purchased a new Turbine from Malaysia with commissioning of the Mill expected to take place in March 2020. This will take energy generated from the use of turbine from current 2.2 MW of electricity to a 5MW and would supply electricity to both factory and staff quarters.
• Key take away: With an estimated 7,783 hectares additional acreage area staged to come on board between 2020-2022, as well as expansion in its Palm Oil milling plant (+15 ton/hour in 2020 and +30 ton/ hour in 2021), we see room for sizeable leap in Okomu’s revenue beyond 2019 emanating from higher volumes. This corroborated with better economies of scale from higher volumes and additional gains from the expansion of its current Turbine from 2.2MW to 5MW energy plant is positive for gross margin expansion over the medium term. Thus, we remain upbeat on the firm’s medium-term outlook. Based on our last communicated FVE, we have a Strong BUY rating on OKOMU at a TP of N97.75. More analysis to follow.

Presco Plc

•  Palm oil Mill expansion to 90ton/ hour in 2020: Firstly, Management guided to expanding its existing Palm oil mill from 60 ton/ hour to a 90 ton/ hour mill in by 2020. Father out management also plans to construct a new 60 ton/ hour Palm oil mill in the Sakponba Estate in 2022.
• Construction work for 500 ton/ day refinery plant has commenced: Furthermore, in a bid to cater for additional FFBs from its new plantings, construction work for 500 ton/ day refinery plant has commenced with expected commission date of Q1 2020. Thus, total refining capacity is expected to come to 600 ton/day in Q1 2020.
• Construction work for 350 ton/ day Palm Kernel Oil (PKO)plant has commenced: Management has also commenced construction of a new PKO plant with capacity of 350 ton/ day.  This is in a bid to expand its PKO plant from its current 60 ton/ day.
• To fund its various expansion needs, management plan to spend N33.4 billion over the next five years split between Agricultural related spending (N20.1 billion) and Industrial related spending (N13.3 billion).  This will be funded with a blend of internally generated sources and external borrowings.
• Management also plans to approach the capital market later this year to raise debt in order to take advantage of the lower interest rate environment. The funds raised will be used to refinance its expensive bank loans and fund its ongoing expansion projects.
• Key take away: Given the additional Fresh fruit bunches (FFBs) from its Sakponba palm estate (7,706 hectares), expansion of its Palm oil mill from 60 to 90 ton/hour in 2020, construction of a new 500 ton/ day CPO refinery plant and 350 ton/ day PKO milling plant, we see room for revenue growth from beyond 2019. Overlaying this with Management’s plan to approach the capital market later this year to refinance its expensive bank loans bodes well for earnings over the medium term. Based on our last communicated FVE, we have a Neutral rating on PRESCO at a TP of N67.47. More analysis to follow.