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The Nigerian Palm Oil Sector – H2-19

In this report we discuss the outlook for the Nigerian palm oil sector and the sector player under our coverage over the rest of 2019.

Weaker Prices, Benign Volume Growth, Depressed Top-line Growth

Over Q1 19, Nigerian palm oil producers had to grapple with the twofold setback of lower domestic crude palm oil (CPO) prices and benign volume growth, with both OKOMUOIL and PRESCO reporting declines in revenue 43% y/y and 16% y/y, respectively. We highlight that, the decline in domestic CPO prices reflected depressed global prices, as CPO supply continues to outweigh demand. While the global crude palm oil (CPO) supply glut picture remains largely intact at the time of writing, we note that CPO prices have recovered, rising by 8% q/q in Q1 19. The resurgence in CPO prices was, in part, driven by the reducing size of the global supply glut. Elsewhere, global rubber prices have also picked up significantly, benefiting from the proposed cartel-like “rubber export restriction” by Thailand, Indonesia, and Malaysia (all of which account for c.72% of global rubber supply). The impact of the foregoing, in our view, bodes well for sector players’ margin.

CPO Volume Growth: A Play for Beyond 2019

On volume, we highlight that unlike the previous quarter wherein healthy volume growth helped limit price erosion passthrough to top-line, Nigerian palm oil producers suffered a material decline in volume in Q1 19. This was as a result of the prolonged election period which slowed field operations, with passthrough to sales volumes. Looking ahead, while we see limited upside for volume growth through the rest of the year, we expect higher prices to support top-line growth over 2019E.

OKOMUOIL:  Don’t Lose Sleep Over 2019

Among players, we like OKOMUOIL due to its proven track record of delivering revenue growth built around two key commodities – crude palm oil and rubber. While we acknowledge that rubber is nearing an inflection point as the company plants an additional c. 1,500 hectares this year, to fully exhaust total land area under rubber plantation, we argue that its CPO operation is entering a new growth phase with a total of 9,000 hectares of mature plantation coming onstream between 2020E and 2021E. The impact of the foregoing should help double the company’s volume over the next three years. Beyond the foregoing, OKOMUOIL is well positioned to benefit from government policies including concessionary loans from the CBN and BOI, absence of company income tax (CIT) on rubber sales, and improved clampdown on illegal importation of CPO, which should support domestic prices.