Significant stock rally awaits Oil Palm producers on attractive valuation

There are indications the lower valuations of quoted Oil palm producers will translate to share price appreciation as their stocks trade below emerging market peers, prompting analysts to place Buy ratings.

Investors and shareholders should take advantage of these positive prognoses to bolster their investment portfolios.

Okomo Oil Nigeria Plc and Presco Nigeria Plc have a price to earnings (P/E) ratio of 7.83 tines and 2.37 times respectively, this compares with similar companies in South Asia (17.64 times), and Africa (12.61 times).

Stocks of companies have been beaten down as investors dump shares over uncertainty surrounding the forthcoming elections and global geopolitical tension such as the trade spat between the United States and China and rate hikes by the United States Federal Reserve that damped investor appetite for emerging market assets.

Also, the Nigerian economy has been growing sluggishly.

Amid the tough and unpredictable macroeconomic environment, oil palm producers have been able to deliver a higher return on investment to shareholders while they’ve turned each Naira invested in sales into higher profit.

Okomu’s and Presco’s return on capital employed (ROCE) of 39.31 percent and 37.04 percent as at the third quarter of 2018 are higher than the NSE 30 firms- the lists of the most liquid and capitalized companies- average of 17.98 percent, according to data from the Bloomberg Terminal.

Similarly, Okomu’s and Presco’s net margins of 34.71 percent and 28.19 percent exceed NSE 30 firms’ average of 22.83 percent, data from Bloomberg shows.

The stellar performance was largely driven by government policy and Nigerian rising population that crave for consumption.

In 2015, the Central Bank of Nigeria (CBN) included palm kernel oil and oil palm in the list of goods banned from its foreign exchange market. Consequently, average palm oil prices jumped in 2016 and 2017 as local demand expanded without corresponding increase in supply.

“Oil palm prices in Nigeria are relatively higher than international prices primarily due to import restrictions on the commodity following the introduction of the central bank’s list of 42 excluded items,” said Abiola Gbemisola, analyst at Afrinvest Research Ltd.

Little wonder Okmou’s ROCE surged to 39.31 percent in the third quarter of 2016 from 6.94 percent in 2015. Similarly Presco’s net margin jumped to 85.71 percent in 2016 from 66.79 percent in 2015.

Analysts at Afrinvest placed Buy ratings on Okomu, on the expectation that profit will be driven by improvements in output based on maturing plantation for the oil palm and rubber business.

“We expect c.8090.0 and 1989.0 hectares respectively of oil palm and rubber plantation to mature with the forecast period of (2018-2023),” said analysts at Afrinvest Research.

However, these two players face obstacles such as backward integration by takers like PZ Wilmer, consistent volatility in crude palm oil price (CPO), shortages of labour force, and the acceptance of African Continental Free Trade agreement (ACFTA). If the federal government accepts the ACFTA, it means the central bank will have to delist kernel oil and palm oil from the list of items banned from foreign exchange market; while there will be influx on cheap products from Indonesia and Malaysia.

Okomu Oil’s shares has risen by 7.60 percent since the start of the year, outperforming the NSE ASI Index which has returned -2.53 percent. However, Presco has returned -6.30 percent year to date, underperforming the broad index.