leveraging favourable policy?

Nigeria Palm Oil Sector Update: Leveraging favourable policy?

1 www.unitedcapitalplcgroup.com

Nigeria Palm Oil Sector Update

Leveraging favourable policy?

Overview

Much ado about Palm oil?

Palm oil is of strategic importance as it is used in the production

of more than half of the products sold in supermarkets globally.

The continuous importance of Crude Palm Oil (CPO) for food,

biofuel and cosmetics purposes has led to uptick in its demand

universally. Palm oil remains the cheapest and most edible

vegetable oil globally. The oil palm tree produces 4.95 ton of

edible oil per hectare (ha), six times more than the rapeseed

tree, the next highest. In addition to its use as cooking oil, it is also

used in the manufacture of soaps and detergents, cosmetics,

pharmaceuticals, biscuits, biodiesel among others.

Outlook

We remain optimistic about the future of the Palm oil industry in

Nigeria as the key player continues to invest aggressively in

capacity expansion. For OKOMUOIL, we expect the c.9,000

hectares of mature plantation from its extension II to support

growth. Also, PRESCO expansion of its existing Palm Oil mill from

60 ton/hour to a 90 ton/hour milling plant by year-end 2020,

construction of a new 60 ton/hour Palm Oil mill in Sokoban estate

which is to be completed in 2023, and expansion of the

company’s palm kernel oil plant to 350 ton/day PKO plant

(current capacity: 60 ton/day) will support their topline growth.

Despite the recent rally in the stock market, we believe that the

key tickers in the Palm oil industry offer an opportunity for

investors to position. To further buttress our stand, valuation

multiples of Nigerian players trade at a discount to African and

Middle Eastern peers.

17th November, 2020

Research Analyst: Oluwashina Akinremi

+234-(0)706-6317-794 [email protected]

Sector Risk Rating: Medium

Competitive Landscape:

Price Performance Chart

Equity Research | Sector Update

Sources: Bloomberg, United Capital Research

Sources: United Capital Research

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Competitive

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Company P/E P/B EV/EBITDA

Okomu Oil Palm Plc 10.64 2.38 6.56

Presco Plc 9.36 1.52 5.72

Middle East and Africa Peer Average 38.89 1.08 9.69

PRESCO

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Table of Content

Global Overview ······································································································· 3 Global production: Still a growth story ······························································································ 3

Global consumption: Positively correlated with population ································································ 3

Key operator in global space…………………………………………………………………………………………….4

Global CPO pricing: Myriads of factors…………………………………………………………………………………..5

Palm Oil in Africa ······································································································ 5 West Africa remains the powerhouse ······························································································ 5

Key Players in Africa Palm oil market…………………………………………………………………………………….6

Nigerian Palm Oil Sector ···························································································· 7 The price of negligence ················································································································ 7

Palm oil demand: Production still lags demand ················································································ 9

Market structure: Okomu trading at premium...……………………………………………………………………… 9

Government policy: icing on the cake ··························································································· 10

Industry prospect, Comparative Analysis & valuation ················································· 10 Nigeria Palm Oil value chain and processing ·················································································· 10

Financial/ Comparative Analysis of key players ············································································ 12

Industry Valuation-Nigeria Companies well below peers ………………………………………………………….13

Company Analysis ………………………………………………………………………………………14 PRESCO Analysis-Light at the end of the tunnel ……………………………………………………………………...15

Okomu Oil: Smiling in Crisis ……………………………………………………………………………………………….18

Securities Trading

+234-1-280-7443 [email protected]

Asset Management +234-1-277-7511

[email protected]

Trustees


Investment Banking


Research +234-1-2800-8125

[email protected]

Contact Us



Global Overview

Much ado about Palm oil?

Palm oil is of strategic importance as it is used in the production of more than half of the

products sold in supermarkets globally. The continuous importance of Crude Palm Oil

(CPO) for food, biofuel and cosmetics purposes has led to uptick in its demand

universally. Palm oil remains the cheapest and most edible vegetable oil globally. The oil

palm tree produces 4.95 ton of edible oil per hectare (ha), six times more than the

rapeseed tree, the next highest. In addition to its use as cooking oil, it is also used in the

manufacture of soaps and detergents, cosmetics, pharmaceuticals, biscuits, biodiesel

among others.

Global Production: Still a growth story…

Globally, demand for palm oil for food, cosmetics, and biofuel, remain robust with

Indonesia and Malaysia being the major exporters in the palm oil industry. According to

Orianresearch, global production of palm oil is expected to reach 72.95 million tons in

2022, at a CAGR (Compounded Annual Growth Rate) of 3.02% between 2017 and 2022.

The growth is expected to be buoyed by strong demand for the product from end-use

industries, increasing utilization of palm oil in food application, ascending consumption of

the product as a feedstock in biodiesel coupled with rising consumer awareness

regarding positive health benefits of palm oil are expected to be the prime drivers of

growth. Indonesia and Malaysia remain the largest production of palm oil accounting for

84.0% of global production.

Sources: Statista, United capital research Sources: USDA, United capital research

Palm oil is of strategic

importance as it is used

in the production of

more than half of the

products sold in

supermarkets globally

consumption of palm

oil tends to correlate

p o s i t i v e l y w i t h

population 0

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Indonesia Malaysia Others Guatemala colombia Papua NewGuinea

Global palm oil top exporter (''000 MT), 2019

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Nigeria colombia Thailand Malaysia Indonesia

Top palm-oil producing countries, millions (metric tonnes)

2018



Global Palm oil consumption: Positively correlated with population

The consumption of palm oil tends to correlate positively with population as eight out of

top ten consumers being the most populous countries in the world. Notably, Indonesia,

India, EU-27, and China accounted for over 70.0% of the world consumption. Also, the

worldwide market for Palm Oil is expected to grow at a CAGR of 5.3% over the next five

years.

Key Operators in Global Palm oil market– An Asian World

The rising demand for palm oil produces continue to pave ways for the players in the CPO

space. Most especially demand from the continent of Asia which currently stand above

80.0% of the total world consumption. Not surprising that Wilmar International Limited,

Demand from the

continent of Asia which

currently stand above

80.0% of the total world

consumption

Source: USDA, United Capital Research

Source: Bloomberg, United Capital Research

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Wilmar Int'l Ltd IOI Kuala Lumpur Sime Darby Golden Agri

Leading palm oil companies worldwide in 2018, based on

market capitalization Million (USD)

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Nig. remains only Africa country in top global consumers

Palm Oil Domestic Consumption by Country in 1000 MT



which is the leading palm oil production company in the world, in terms of market

capitalization, is based in the continent (Singapore to be precise).

Global Crude Palm Oil Pricing- Myriads of factors

CPO price is driven by several factors, chiefs among which are supply and demand of

palm oil, price of competing vegetable oils, weather patterns, import policies of importing

countries and changes in taxation and import policies. The global CPO price which has

been on the rise since 2005, received a great blow in 2007 due to the global financial

crisis which melt down the global economy. Hence, it saw a decline of 17.3% between

2006 and 2008. Also, the demand from China and India (which accounted for c.36% of

global palm oil imports) declined significantly.

Overview of Palm oil in Africa

West Africa remains powerhouse

The African oil palm originated in West Africa and has grown extensively in this region. The

oil palm traditionally known to catered for the rural populations in West Africa with supply

of vegetable fat and oil, palm wine and some regionally important non-wood forest

products. Palm oil has grown from being a subsistence crop in small-scale farming systems

to a large-scale palm oil production. As the demand for palm oil in West Africa begin to

rise, investors begins to see prospects in that line as companies with existing plantations

looking to expand their operations into west Africa in order to take advantage of the

growing demand for palm oil with smallholders currently account for 70–90% of African oil

palm growers.

Source: Bloomberg, United Capital Research

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Price movement of crude palm oil price in 20yearsCPO still above 10years average amid Covid-19

Palm Oil Price 10Yrs Average



Looking at the production side, Nigeria remains the top palm oil producer in Africa based

on the data by USDA above, despite Nigeria being the largest producer of palm oil in

Africa, Cote Divoire remains the largest exporter of the commodity, with Nigeria settled at

the sixth position on the list of palm oil exporting countries in Africa.

Key players in Africa palm oil market

The palm oil market in Africa has been majorly denominated by foreign companies outside

the continent either through direct foreign investment or acquiring an existing indigenous

firm. Some of these players are:

Source: USDA, United capital research

Source: USDA, United capital research

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Top palm-oil producing countries (MT'000), 2020

Nigeria remains top producer in Africa

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Benin Kenya Ghana Togo Nigeria Egypt Tanzana CongoDRC

Largest exporter of palm oil in Africa, 2020Cote Di'voire top export chat in Africa (MT'000)



• WILMAR

The Singapore-listed agri-business owns oil palm estates in Uganda and West Africa via joint

ventures with a total planted area of about 6,000 hectares and 39,000 hectares. The joint

ventures also manage nearby smallholders’ schemes in these areas. Wilmar recently started

buying shares in Ghana’s Benso Oil Palm Plantation in a takeover bid from Unilever Ghana.

• Sime Darby

Sime Darby is the world’s largest listed planter by land holdings, with a 220,000-hectare

concession in Liberia in a 2009 deal.

• Quifel

Brazilian agriculture operator Quifel runs farms in Mozambique, Sierra Leone, and Angola. The

firm has 40,000 hectares of land for oil palms, sugar, and rice

• Fri-El Green

The Italian green fuels firm signed a 30-year deal with the Republic of Congo to take over

40,000 hectares of oil palms in 2008. The deal includes taking over two state-owned planters.

The firm took over a dormant oil palm estate in Nigeria in 2007 that came with a concession

of over 11,000 hectares with rights to extend land to 100,000 hectares

The Nigerian Palm Oil Sector

The price for negligence

Nigeria controlled 45.2% of world palm oil production in 1961, exported 167.2 metric tons,

representing 26.6% of total world palm oil export to lead the likes of Malaysia and Indonesia.

However, underinvestment and years of neglect has seen the industry production decline to

a point where the country is now a net importer of what it used to have in excess , as

Indonesia and Malaysia displaced Nigeria due to their continuous investment in research

and development leading to higher varieties and ultimately higher output.

Several factors, ranging from poor infrastructure to inadequate finance, poor access to

fertilizer, land tenure system and low crop yields as well as invasion of cheaper imports are

responsible for lagging of Nigeria palm oil industry. The deficiency of supportive infrastructural

facilities such as access road to some of the plantation and inadequate technology for

optimum extraction from the fruits, leads to wastage as a lot of oil is left un-extracted from

the pulp.

Nigeria controlled

45.2% of world palm oil

production in 1961,

exported 167.2 metric

tons, representing



Food and Non-food uses of Palm oil

Palm oil is used in Nigeria for food and non-food consumption. Basically, four palm oil

products are marketed in Nigeria:

• The low quality Oil known as Technical Palm Oil (TPO), which is sold as unprocessed oil

for traditional use, meaning essentially consumed by household;.

• The high quality called Special Palm Oil produced by large mills and used by industries,

usually refined.

• The Palm Kernel Oil derived from the kernel of the fruit and used by industries.

• The Refined Bleached Deodorized Oil (RBD), which is a refined oil from which colours

and smells are removed.

Sources: USDA, United Capital Research

Sources: PIND, United Capital Research

Food Uses Non-food uses

Cooking Oil Cosmetics and personal cares

Deep Frying Oils Soaps

Margarines and spreads Leather

Bakery fats Pharmeceuticals

Cocoa butter alternative fats Lubrications and Grease

Confectionary fats leather

Ice cream fats Industrial Chemicals

Infants nutrition fats Biodiesel

Food and non-foos uaes of palm oil products



Palm Oil demand: Production still lags demand

According to the World Bank, Nigeria is the largest consumer of palm oil in Africa given its huge population. In 2018,

Nigeria consumed c. 3.0mn metric tons (MT) of fats and oils, with palm oil accounting for 44.7% (1.34mn MT). In the same

period, palm oil production stood at 1.02mn MT, resulting to a supply shortfall of 0.32mn MT. Thus, indicating opportunities

for local production expansions. In a bid to increase local production, the federal government through the independent

CBN included palm oil as part of the prohibited items for FX auctions in Nigeria.

Further, lack of access to finance by most of the smallholder farmers inhibits their ability to improve their inputs, just as

unstable nature of electricity supply in the country also translate into higher costs of production for farmers as millers,

putting them at disadvantage to compete with cheaper imports. Even though 3mn hectare was cultivated, in 2014, only

910,000 tons was produced, due to cultivation of low yield crop.

Nigeria Palm oil market structure: Okomu oil trading at premium The Nigerian Palm Oil market can be said to be an oligopolistic in nature with two players largely dominating the scene.

PRESCO has established itself as the stronger player by constantly outperforming its major competitor (OKOMU) revenue

wise in the last six years. However, using market capitalization as a proxy, OKOMU appears to be trading at premium to

PRESCO by wielding c.61.0% of the total market share leaving PRESCO to c.39.0%


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Presco constantly outperfrom Okomu, revenue as proxy (N'bn)

OKOMU PRESCO

Sources: Companies Financials , United Capital Research

61%

39%

Oligopolistic market with a clear leaderOkomu trading at premium

Okomu Presco





Government policy: Icing on the cake

The policy of the federal government policies has been favourable to the sector. Policy such as; 35% levy on imported

palm oil, import ban on refined oil, the exclusion of palm oil and related products from sourcing dollars from the official FX

market and the border closure since August 2019, have been supportive for the oil palm sector. However, considering the

volatility in government policy due to change of government, there is a medium to long term downside risk of policy

reversal.

Industry prospect, Comparative Analysis & valuation

Nigeria Palm Oil value chain and processing The palm oil value chain is composed of a wide range of players belonging to different channels depending on the

production technique and type of oil. Notably, palm oil is majorly produced in South Nigeria and marketed in all other

parts of the country. The major functions in the value chain process are production, primary processing, secondary

processing, wholesale and retailing.

• PRODUCTION

Production of palm oil is carried out in various production systems, some of which include: Small / medium and large

1. scale farms: the acreages of this category are between 1 and 25 hectares. The variety planted is mostly Tenera.

Small scale farms are mainly informal and palm oil is processed at family or community level, so the use of manual

processing is common. Production is dominated by traditional techniques. The medium and large-scale farms tend to

use improved processing technologies and are adopting new techniques to improve marketing.



2. Wild-groves Farmers: this production system involve renting trees from the landowners and the yields for

this type of production are very low, which makes it the least productive channel.

3. Estates: The Special Palm Oil (less or equal to 5% Free Fatty Acid) is mostly produced by estates. They

can provide high quality crude palm oil to the secondary processors. Some estates are still owned by

the State. The small estates are owned by individuals or cooperatives. The medium estates belong to

corporations or to the State and some of the large estates are integrating into large scale processing.

• PROCESSING

According to the method used, the levels of oil extraction varies widely. Indeed, in the traditional channel,

most of the palm oil is produced by women using manual traditional methods namely mortar and pestle.

Oil extracted usually reaches only 25% of the available oil in the fruit. Some small farmers use mini–

improved processing units which are semi-mechanized. The medium scale processors process the fruit with

a screening machine, boiler, digester, press, clarifier and generator. They employ around 10 persons to

operate. The large-scale processors attached to the estate mills offer high yields of 75% oil extracted of the

available oil.

• SECONDARY PROCESSING

Special Palm Oil (SPO) and Palm Kernel Oil (PKO) are the main inputs for secondary processing. The SPO

production is not enough to match the refined company capacities as it is able to supply less than 50% for

production. As a result, some companies source palm oil internationally through imports

• RETAILING Retail

These can take place in roadsides, local/periodic market centers and stands as well as wholesale. Each retail

point is characterized by activities of trading associations, consequently the retail market is restricted as it

does not allow free entry into the business. Indeed, distributors must be registered by paying a large

amount of money to the associations. The members fix the price of palm oil.



Financial/ Comparative Analysis of key players at Glance

Sources: Companies Financials , United Capital Research Sources: Companies Financials , United Capital Research





Industry Valuation-Nigeria Companies well below peers





Companies



Presco Plc

In need of balance sheet optimization

Topline Analysis: Impressive topline

The performance of PRESCO 9M-2020 result was quite an impressive

one as the macro economic environment bolstered by (Border

closure, FX scarcity and favourable government policy) continue to

support the business growth. Hence, revenue increased by 24.5%y/y

to N18.9bn. We understand that the bulk of firm’s revenue comes

from the sales of refinsed CPO. The company does not really

concentrate on the sales of CPO. Going forward we expect to see

continued improvement in the topline of PRESCO has the company

recently concluded plans to diversify the business in a bid to play in

the rubber and cocoa markets. We see this move as a positive

development for revenue, considering as we believe that it will helps

the broader base for revenue. The move also presents an opportunity

for forex earnings. According to the management, the rubber

production will be 100% exported.

Operating Margin: Resilient amid cost increase Cost of sales increased by 19.9% to N7.0bn. However, a faster

increase in revenue was able to compensate for the cost of sales

increase. Hence, the gross profit jumped 27.3% to N11.9bn. Also,

finance cost declined by 7.6% to N1.2bn. Hence, the profit before

and after tax improved by 51.0% and 56.4% to N6.6bn and N5.0bn,

respectively.

Balance sheet analysis: Anything to cheer?

PRESCO continues to invest heavily in long-term assets as evident by

the over 100% increase in borrowing to N26.3bn. Some of the

investment include expansion of its existing Palm Oil mill from 60 ton/

hour to a 90 ton/hour milling plant by year-end 2020, Construction of

a new 60 ton/hour Palm Oil mill in Sakponba Estate to be completed

in 2023, expansion of the company’s palm kernel oil plant to 350 ton/

day PKO plant (current capacity: 60 ton/day). Notably, Cash and

cash equivalents fell 40.5%y/y to N3.5bn, following a N6.5bn loan

repayment made during the year. However, Borrowing via overdraft

(OD) rose from N7.1bn to N8.0bn, accounting for 36% of all interest

17th November, 2020


+234-(0)706-6317-794 [email protected]

Risk Rating: High

Key Data


Stock Rating HOLD

Target Price

Old N57.0

New N81.5

Expected Return 2.2%

Equity Research | Earnings Update

Last Price (₦) 60.5

52 week High/Low (₦) 60.5/31.3

1M Price Change (%) 23.5


6M Price Change (%) 66

YTD Change (%) 27.4

Beta 0.85

Market Capitalization (₦’m) 60,500.00

Market Capitalization ($’m) 156.90

Shares Outstanding. (Units’bn) 1

Float (%) 39.9

Dividend Yield (%) 3.4

Note: Refer to appendix for complete description of risk rating


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PRESCO

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Presco Plc: In need of balance sheet optimization

bearing liabilities. Further analysis indicated that average cost of OD in the books of the

firm is estimated at c.12.0%. For balance sheet optimization purpose, we think PRESCO

should consider taking advantage of the low yield environment in the debt market by

registering a commercial paper to refinance and average down it’s cost of capital. For

context, PRESCO would have saved close to 50% of its finance expense attributable to

OD if the said N8.0bn was raised in the debt capital market.

Outlook: HOLD rating maintained

The future looks bright as the company continue to invest aggressively in CAPEX. Apart

from some of the planned capacity expansion project on-going for 2020, management

also guided on the plan to invest c. N34.0bn in CAPEX for the next five years. This is

expected to be financed via internally generated funds and external borrowings. In

addition, we expect the recent diversification into rubber and cocoa to support the

topline coupled with favorable government policy towards the sector. Accordingly, we

have estimated a Revenue growth of 23.7%y/y to N24.6bn in FY-2020E. We expect a mild

decline in Cost of Sales growth; hence, gross margin is expected to be strengthen. Also,

we have estimated a mild decline in OPEX as the company is expected to improves effort

to drive cost efficiency. In all, we expect the surge in PBT and PAT to be sustained, fueled

by lower base effect of the 2019 performance. PRESCO currently trades at a forward EV/

EBITDA of 5,7x, which is below both the local and EM peers average of 6.14x and 9.7x,

respectively; implying that the ticker is currently undervalued. Putting the above together

and factoring the current market volatilities, we update our risk free rate and equity risk

premium to reflect the current realities. Hence, we revised our TP to N81.5.0/share with a

potential upside of 2.2%.



Presco Plc: In need of balance sheet optimization

Securities Trading


Asset Management

+234-1-277-7511 Assetmanage-

[email protected]

Trustees


Investment Banking

+234-1-280-7583 InvestmentBank-

[email protected]

Financial Highlights (N'Mn)

Sources: Company Financials, United Capital Research

Contact Us

Headlines 9M- 2019 9M- 2020 FY-2020E

Revenue 15,197 18,917 24,594

Cost of sales -5,837 -7,000 -6,553

Gross Profit 9,360 11,917 18,041

Operating expenses -3,884 -4,125 -5,448

Other income 200 5 8

Finance cost -1,320 -1,220 -1,994

Profit/Loss Before Tax 4,356 6,577 9,942

Taxation -1,139 -1,547 -2,162

Profit/Loss After Tax 3,217 5,030 7,780

FY- 2019 9M- 2020 FY-2020E

Cash and cash equivalents 5,935 3,534 4,716

Trade & Other Receivables 6,832 5,945 5,759

Trade & Other Payables 8,181 6,627 7,616

Borrowings 31,554 26,315 28,512

Total Assets 71,010 69,111 70,229

Net Assets 27,888 30,918 33,343

Operating Margin -25.6% -21.8% -22.2%

Net Margin 21.2% 26.6% 31.6%

Leverage (Debt/ Equity) 113.1% 85.1% 85.5%

Price(N) 65.9 74.0

EPS(N) 5.0 7.3

BVPS(N) 30.9 33.3

P/E(x) 13.1 10.1

P/BV(x) 2.1 2.2

ROAE 17.1% 17.9%

mailto:[email protected]



Okomu Oil Plc

Brighter days ahead

Topline Analysis: CPO production expansion spur Revenue

growth

OKOMUOIL revenue for 9M-2020 jumped 19.8%y/y to N18.6bn. The

increase was fueled by the continuous closure of land border which

has reduced the activities smuggler of lower CPO, FX scarcity which

has curtailed imports and creates an avenue for local players to

increase CPO prices and also drive volume in a bid to meet the

growing demand in the country. Notably, the Q3-2020 standalone

revenue saw a decline of 27.0% to N5.1bn, this was due to the high

base effect of the corresponding quarter in 2019. Analysing the 9M

revenue further, we observed that the growth was buoyed by local

sales as revenue from domestic sales grew 27.4%y/y to 16.7bn while

the export sales (rubber) declined by 20.4%y/y to 2.0bn, WSe

attributed the decline in rubber sales to the combination of lower

rubber prices and volumes. On volume, it was clear that OKOMU’s

rubber production maxed out in 2019 as the company planted an

additional c.1,500 hectares, to fully exhaust its total land area for

rubber plantation. Hence, we expect rubber production to remain

tepid in the near term.

Cost of sales Analysis: Cost reduction buoyed gross margin

The cost of sales declined 2.5%y/y to settle at N2.2bn. A deeper look

at the cost of sales revealed that CPO cost of sale increased by 3.7%

to 1.9bn, while rubber cost saw a significant decline of 32.7% to

0.02bn. The cost of sales saw a huge decline in H1-2020 which was

due to the harvest season of company which always make the

company to incur lower cost in first half of the year. While the Q3-2020

cost of sales saw a spike of 104.8% to N1.1bn. However, the huge

decline in cost of sales in H1-202 was still able to relief the pressure on

gross profit. The gross profit increased by 23.5%y/y to N16.5bn.

Notably, the finance cost skyrocketed by 109.4%y/y to 0.5bn amid a

significant decline in finance income by 97.2%y/y to N0.01bn.

17th November, 2020


+234-(0)706-6317-794 [email protected]

Risk Rating: High

Key Data


Stock Rating BUY

Target Price

Old N85.0

New N88.0

Expected Return 10.0%

Equity Research | Earnings Update

Last Price (₦) 80.0

52 week High/Low (₦) 80/49.5




YTD Change (%) 43.9

Beta 0.6

Market Capitalization (₦’m) 76,312.80

Market Capitalization ($’m) 197.90

Shares Outstanding. (Units’bn) 0.95

Float (%) 94.6

Dividend Yield (%) 2.3

Note: Refer to appendix for complete description of risk rating


OKOMU

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NSE-ASI OKOMUOIL



Okomu Oil Plc: Brighter days ahead

Balance Sheet Analysis

To further give context to the impressive performance of OKOMU, the company reported

a 89.5%y/y spike in Cash & Cash Equivalence to N5.1bn. Borrowings grew by 33.6% to

N11.0bn, this clearly speak to the surge seen in finance cost as highlighted above. Worthy

of mention, total assets surged by 13.5%y/y to N49.5bn, net asset trailed same path to

record a growth of 7.2%y/y to N31.3bn.

Outlook: Brighter days ahead

For the rest of 2020, we are positive about the company and we expect growth in

revenue to be fueled by continued volume growth as the firm continue to leverage in its

strong brand to push more to the market coupled with ongoing FX scarcity that will

discourage import. Hence, we forecast revenue growth of 23.7% y/y to N23.3bn. Notably,

our growth in revenue is expected to be driven by CPO volume growth. This is further

supported by the c.9,000 hectares of mature plantation from its extension II highlighted

above. Also, we expect Cost of Sales growth to come lower compare to revenue growth,

hence, gross margin is expected to be strengthen. OKOMUOIL currently trades at a

forward EV/EBITDA of 6.6x, which is well below EM peers average of 9.6x. Putting the

above together, we revised our valuation assumption at 12M-TP of N88.0/share with a

potential upside of 10.0% when compared to the current price of N80.0/share.

Securities Trading

+234-1-280-7443

[email protected]

Asset Management

+234-1-277-7511

[email protected]

Trustees

+234-1-280-7275

[email protected]

Investment Banking

+234-1-280-7583

[email protected] Sources: Company Financials, United Capital Research

Contact Us




Okomu Oil Plc: Brighter days ahead

Securities Trading

+234-1-280-7443

[email protected]

Asset Management

+234-1-277-7511

[email protected]

Trustees

+234-1-280-7275

[email protected]

Investment Banking

+234-1-280-7583

[email protected]

Financial Highlights (N'Mn)

Sources: Company Financials, United Capital Research

Contact Us

Headlines 9M- 2019 9M- 2020 FY-202E

Net Revenue 15,543 18,620 24,339

Cost of sales -2,215 -2,159 -3,599

Gross Income 13,328 16,461 20,740

Operating expenses -7,395 -9,203 -10,945

Finance Income 381 11 15

Finance cost -215 -450 -550

Profit/Loss Before Tax 6,100 6,819 9,260

Taxation -1,987 -1,820 -2,071

Profit/Loss After Tax 4,112 4,999 7,189

FY-2019 9M- 2020 FY-202E

Cash and cash equivalents 2,684 5,086 2,787

Trade & Other Receivables 5,053 4,520 5,764

Trade & Other Payables 3,531 4,483 4,524

Borrowings 8,264 11,039 13,652

Total Assets 43,596 50,449 52,906

Net Assets 29,180 32,271 45,009

Gross Margin 85.7% 88.4% 85.2%

Net Margin 26.5% 26.8% 29.5%

Cost to Sales 14.3% 11.6% 14.8%

Leverage (Debt/Equity) 28.3% 34.2% 30.3%

Price(N) 80.0 88.0

Trailing 12M EPS(N) 6.2 7.5

BVPS(N) 33.8 47.2

P/E(X) 12.9 11.7

P/BV 2.4 1.9

ROAE 19.3% 19.4%




Disclosure

Appendix



Investment Rating Criteria and Disclosure

United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;

Buy: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater than the Asymmetric Corridor around the MPR

of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.

Hold: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at 31st December is greater zero but less than the Asymmetric Corridor

around the MPR of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 9%).

Sell: Based on our valuation and subjective view (if any), the expected upside on the stock’s close price as at December 31st is less than zero.

NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking

relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.

Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.

Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in

activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s

Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published

research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable conflicts of interest that may arise in the course of its business relationships.

Risk Rating

Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in

significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk. Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from

government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets. Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.

These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest, government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.

United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem

applicable the company of focus. The ratings are defined below;

High: High probability of an imminent systematic risk or/and unsystematic risk

Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk

Low: Low probability of an imminent systematic risk or/and unsystematic risk

Analyst Certification

The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this

report.

2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report.

Other Disclosures

United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,

potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report are disclosed:

• UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report

Disclosure keys

a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence

on the company’s operating decision directly or through proxy arrangements

c. UCAP is a market maker in the publicly traded equities of the Company d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company

e. UCAP beneficially own 1% or more of the equity securities of the Company f. UCAP holds a major interest in the debt of the Company

g. UCAP has received compensation for investment banking activities from the Company within the last 12 months h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months

i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution

j. The Company is a client of UCAP k. The Company owns more than 5% of the issued share capital of UCAP

Disclaimer

United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets

and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)

nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell

securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is

registered with the Securities and Exchange Commission and its subsidiary, United Capital Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact

United Capital Plc, 12th Floor, UBA House, 57 Marina, Lagos. ©United Capital Plc 2018.*

Disclosure Appendix

Company Disclosure Dangote Cement Plc g,h Flour Mills of Nigeria Plc g,h FCMB Plc h Fidelity Bank Plc g,h Forte Oil Plc g,h Stanbic IBTC Plc h PZ Nigeria Plc h

leveraging favourable policy?

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