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Nigerian Palm Oil Sector - Weaker CPO prices dim sector outlook

• Following the H1 18 results and our recent discussion with Management, we update our assessment of the palm oil sector and outlook for Okomu and Presco. In the wake of weakening global crude palm oil (CPO) prices and relative stability in the naira at the parallel market, domestic CPO prices have trended lower with passthrough on margins and earnings of our coverage companies. We also look at the current market dynamic and the inherent opportunities that abound for sector players given Nigeria’s position as a net importer of CPO.
• We believe the recent sell-off in the shares of Okomu and Presco provides upside opportunity for investors as valuations remain undervalued to the inherent sector opportunities and earnings outlook. Particularly, at 8.8x, the sector’s mean P/E remains cheap relative to Bloomberg Africa peers (13.65x). Across our coverage, we prefer Okomu due to expectation of lower interest expense emanating from its slimmer debt profile compared to that of Presco. Also, the demand-supply gap for CPO coupled with Okomu’s expansion plans guides to stronger earnings in the medium term.
• Okomu Oil Palm Plc. On the heels of lower than expected CPO prices over 2018 we cut our FVE by 10% to N45. However, given current share price of N73.2 which implies a 26% upside on the stock we have a STRONG BUY rating on the stock. Okomu trades at a FY 18E P/E of 8.29x which is at a discount to Presco’s 9.2x and Bloomberg MENA peers of 13.65x. At current price, our dividend expectation of N2.28 over FY 18E translates to a dividend yield of 3%.
• Presco Plc. Following lower than expected CPO prices as well as expectation of higher interest expense tailing ramp up in Presco’s debt stock over the period we cut our FVE by 2% to N47 which retains our BUY rating on the stock. Presco trades at a FY 18E P/E of 9.2x relative to Okomu’s 8.29x and Bloomberg MENA peers of 13.65x. At current price, our dividend expectation of N1.13 over FY 18E translates to a dividend yield of 2%.