At first glance, it would be hard to see an immediate link between the Russia/Ukraine war or developments in Indonesia and palm oil makers in Africa’s biggest economy.
But Nigerian palm oil producers benefited from record-high crude palm oil (CPO) prices in the first half of 2022, which was primarily driven by disruptions in the sunflower oil market brought on by the Russia-Ukraine war and Indonesian export restrictions.
Data from the Nigerian Exchange Group (NGX) showed Nigerian palm oil producers smile to the banks as the two largest oil palm producers in the country, Okomu Oil Palm and Presco Plc grew their revenue by 83 percent to N82.47 billion in the first half of 2022 from N45.09 billion in the corresponding period of 2021.
However, in the fourth quarter (Q4) of 2022, there was a 29.2 percent pullback in palm oil prices on the back of increased supply from Malaysia and Indonesia (the two largest producers of CPO) and an expected slowdown in demand from China and India, hence the quarterly decline in revenue reported by Okomu Oil Palm and Presco Plc.
Collectively, Okomu and Presco’s revenue declined by 36.47 percent to N26.91 billion in the third quarter of 2022 from N42.36 billion in the second quarter of 2022, therefore bringing total revenue to N59.84 billion in the second half of 2022 (July to December), 27.43 percent down from N82.46 billion in the first half of 2022 (January to June).
Notwithstanding, revenue reported by Nigerian palm oil producers grew by 68 percent to N142.31 billion in 2022, from N84.82 billion in 2021, thereby bringing total profit for the year to N38.81 billion, a 26 percent increase from N30.86 billion in 2021.
However, profitability was abated by the rising prices of raw materials, foreign exchange volatility, and rising interest rates during the year, which pressured profits and caused the profit margin recorded by the palm oil producers to shrink by 911 basis points to 27.27 percent in 2022 from 36.38 percent in 2021.
Profit margins, which are computed as net income divided by revenue, do not always improve when sales are increased or costs are reduced.
Increasing revenue can result in higher costs and lower profit margins, and cutting costs can result in diminished sales and also lower profit margins if market share is lost over time.
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“Average CPO prices in Nigeria traded at a 56.7 percent premium (57.8 percent premium in 2021) to global prices in the nine-month period of 2022, primarily due to the impact of persistent Naira weakness in the parallel market,” CardinalStone stated in a note.
Furthermore, palm oil producers have had to deal with the energy crisis which has significantly impacted operating expenses, and prices of fertilizers which hit record highs in 2022 due to supply chain disruptions.
The hawkish stance taken by the apex bank in 2022 also impacted the cost of borrowings, with Nigerian palm oil producers recording a 211 percent spike in finance costs to an aggregate of N10.11 billion in 2022 from N3.25 billion in 2021, further shrinking profitability.
Okomu Oil Palm Plc
Okomu Oil Palm’s profit margin, a metric used to assess a firm’s financial health dipped by 159 basis points to 29.27 percent in 2022 from 30.86 percent in 2021 on account of rising input and operational costs.
It reported revenue of N59.25 billion in 2022, a 58.46 percent increase from N37.39 billion in 2021, on the back of rising CPO prices in the first half of the year.
On a quarterly basis, revenue declined by 54 percent in the third quarter of 2022 to N9.42 billion from N20.27 billion in the second quarter of 2022, and declined further by 3.7 percent to N9.07 billion in the fourth quarter of 2022, also influenced by CPO prices pullback.
The cost of sales grew by 69.73 percent to N19.79 billion in 2022 from N11. 66 billion in 2021, and accounted for 33 percent of the palm oil producers’ revenue during the period. On a quarterly basis, the palm oil producer’s cost of sales grew by 14 percent and gulped its entire revenue in the fourth quarter, driving the firm to report a loss of N714 billion.
Furthermore, operating expenses also grew by 60.62 percent in 2022 to N14.44 billion from N8.99 billion in 2021, on the back of rising energy costs during the period, and finance costs spiked by 236 percent to N672 billion in 2022 from N2.26 billion in 2021 on the back of rising interest rates.
A breakdown of its finance costs shows that interest on long-term loans surged by 135 percent to N1.49 billion in 2022 from N636 million in 2021, while it reported an exchange loss of N786 million.
The palm oil producer also reported a finance income of N178 million in 2022, a 264 percent rise from N49 million in 2021.
Consequently, profit for the period amounted to N17.34 billion in 2022, 50 percent higher than N11.54 billion in 2021.
Presco Plc
Despite profit and revenue increasing by 11 percent and 75 percent respectively, rising operational, input, and finance costs push Presco’s profit margin to shrink by 1,488 basis points to 25.85 percent in 2022 from 40.73 percent in 2021.
The palm oil producers’ profit grew to N21.47 billion in 2022 from N19.32 billion in 2021, while its revenue grew to N83.06 billion in 2022 from N47.43 billion in 2021.
On a quarterly basis, revenue was up 36 percent to N23.86 billion in the fourth quarter of 2022 from N17.49 billion in the third quarter of 2021.
The cost of sales, however, grew faster than its revenue, surging by 122 percent during the period to N34.79 billion in 2022 from N15.67 billion in 2021, thereby accounting for 42 percent of the total revenue reported in 2022.
Operating expenses also surged by 83.45 percent in 2022, amounting to N18.73 billion from N10.21 billion in 2021 indicating the impact of the energy crises which was more pronounced due to its decision to pivot towards a more energy-intensive RBDO output.
Further analysis shows administrative expenses accounted for the bulk of operating expenses, however, the 126 percent growth reported in selling and distribution expenses provided the boost in operating expenses reported in 2022.
Additionally, finance costs further drove the profitability decline surging by 204 percent in 2022 on the back of rising interest rates.
Its finance costs surged to N7.85 billion in 2022 from N2.58 billion in 2021, while finance income declined to N14.7 million in 2022 from N18.18 million in 2021.
Analysts say oil palm producers are an enormous beneficiary of the government policies over the last six years as president Muhammadu Buhari’s administration is steadfast to ensuring that the country attains sufficiency in food.
In 2015, the central bank stopped importers of 41 items, including oil palm and textiles from accessing official foreign exchange markets, that policy was a boon for operators in the industry.
Four years after, the border closure imposed by the government to curb influx of cheap and substandard products was a blessing in disguise
