- Experts seek progress in production of sustainable palm oil in Nigeria
As Nigeria strives to revamp its economy, the latest quarterly results of the two established palm oil estate firms listed on the Nigerian Exchange Limited has shown the prospect the agricultural sector has to offer is adequate and structured investment is made. FESTUS OKOROMADU reviews the quarterly results alongside experts’ analysis of the industry.
The third quarter’s financial reports of the two Palm oil farm firms sited in Edo State Nigeria testify to the huge prospect of agricultural potentials of the nation’s economy.
The two farm estate firms of Presco Plc and Okomu Oil Plc have shown huge capacity in creating value for investors as they continue to strive for higher bottom-line in order to boost dividend payment prospects.
For instance, Presco Plc, in its unaudited nine months result for the period ended September 30, 2024 posted an improved revenue growth of 67.3 percent to reach N128.57 billion against N76.87 billion earned in the corresponding period of 2023. But it went ahead to report an impressive 120.5 percent increase in profit after tax of N51.77 billion compared to N23.47 billion in the similar period of 2023. Thus, scaling earnings per share (EPS) of the stock to N12.89 representing 53.6 percent increase year-on-year (YoY).
On its part, it grew its revenue year-on-year for the nine months by 71.4 percent from N60.65 billion in 2023 to N103.95 billion in Q3’ 2024 while within the three-month period of the quarter, revenue grew by 44.4 percent to N28.94 billion from N20.05 billion reported in the corresponding three-month period in 2023.
The company then reported a profit after tax growth of 35.5 percent N28.34 billion N20.92 billion on the nine-month performance but did better within the three months making the quarter as PAT in the period grew by 72.5 percent to N8.14 billion from N4.72 billion in similar period of 2023. This translated to a standalone 72.5 percent growth in EPS during the period.
“According to the Central Bank of Nigeria, if Nigeria had maintained its market dominance in the palm oil industry, the country would have been earning approximately $20 billion annually from cultivation and processing of palm oil as at today”
By implication, the shareholders of both firms are expecting higher dividend earnings from their investment in the firms for the 2024 financial year despite the current economic hardship in the country.
Highlights of Q3’ 2024 result of Presco Plc
Further analysis of the nine-month result of Presco Plc revealed that the 120.5 percent YoY growth in PAT was inspired by a sturdy topline increase and tamer cost expansion.
The company’s performance was bolstered by elevated global crude palm oil prices which have risen year-to-date by 37.9 percent to $1,096.14 (far higher than the price of crude oil) and potential volume improvements. The result is, revenue grew by 67.3 percent YoY, crossing the N100.00 billion mark to settle at N128.57 billion.
More important, is that the company demonstrated effective cost management, with the cost of goods sold (CoGS) rising by a modest 29.2 percent YoY against industry cum peers’ growth rate of 80.2 percent YoY. As a result, gross profit increased by 89.0 percent, and the gross profit margin expanded by 8.3 ppts to 71.9 percent
Although operating expenses grew by 44.7 percent to N23.20 billion, Presco benefited from the 87.4 percent increase in other income.
Consequently, EBIT rose by 98.4 percent YoY, with the EBIT margin expanding by 9.2 ppts to 58.3 percent
Net finance costs rose by 30.1 percent YoY as the increase in finance costs of N8.44 billion outstripped finance income of N575.1 million.
Ultimately, profit after tax (PAT) climbed 120.5 percent YoY to N51.77 billion, with the net profit margin scaling by 9.7 ppts to 40.3 percent.
Okomu Oil Plc
On its part, Okomu Oil reported a revenue growth of 44.4 percent YoY in the three months of Q3 ‘24 and 71.4 percent growth YoY in the nine month period which was underpinned by growth across the export which rose by 49.8 percent YoY and contributed 54.2 percent of revenue as against local market growth of 38.4 percent YoY contributing 45.8 percent of revenue to sales lines.
Experts have attributed the performance to the impact of naira devaluation on CPO prices.
However, on a quarter-on-quarter basis, revenue declined by 8.2 percent primarily due to a decline in local sales declining by 32.6 percent QoQ, while export sales recorded 28.9 percent QoQ increase.
Further analysis shows that gross margin contracted YoY to 51.1 percent in Q3 ‘24 driven by the effects of significant cost pressures on the company’s operations.
It is assumed that higher costs emanated from the impact of the marked currency devaluation on the cost of fertilizers amid the elevated inflationary environment.
In terms of impact of cost of finance on its operational activities during the period under review, Okomu Oil Plc recorded a net finance income of N712.45 million in Q3 ‘24 as against net finance cost of N777.72 million in Q3 ‘23 following a 19.8x YoY uptick in finance income.
The sharp growth in finance income was primarily driven by the substantial increase in exchange gain which rose 20.1x YoY to N2.02 billion.
Profit before tax increased by 80.6 percent YoY to N11.41 billion in Q3 ’24, compared to N6.32 billion inQ3 ‘23. Following a tax expense of N3.27 billion as against N1.60 billion in Q3 ‘23, profit after tax came in at N8.14 billion up from N4.72 billion in Q3 ‘23, representing an increase of 72.5 percent YoY.
Prospect of palm oil industry
As evidence in the financial reports of the two firms Palm Oil farming possesses huge value due to the strategic importance of Palm Oil as research indicates that it is used in the production of more than half of the products sold in supermarkets globally.
“The country’s large and rapidly growing population will continue to be a major driver of demand and so the implementation of sustainable practices in the industry is important”
In the local market, a World Bank 2018 report stated that Nigeria is the largest consumer of palm oil in Africa.
The nation consumed approximately 3 million metric tons (MT) of fats and oils in 2018, with palm oil accounting for 44.7 percent or 1.34 million MT. In the same period, production stood at 1.02 million MT resulting in a supply shortfall of 0.32 million MT (excluding possible impact of palm oil exports).
This negates the country’s position in early 1960s, when Nigeria was the world’s largest palm oil producer with a global market share of 43 percent. Today, it is the 5th largest producer with less than 2 percent of total global market production of 74.08 million MT. In 1966, Malaysia and Indonesia surpassed Nigeria as the world’s largest palm oil producers.
Since then, both countries combined produce approximately 80 percent of total global output, with Indonesia alone responsible for over half i.e. 53.3 percent of global output.
According to the Central Bank of Nigeria, if Nigeria had maintained its market dominance in the palm oil industry, the country would have been earning approximately $20 billion annually from cultivation and processing of palm oil as at today.
Structure of palm oil industry in Nigeria
In a report titled, X-raying Nigerian palm oil sector, global business consultants, PwC highlighted the enormous potential the industry has to offer in terms of economic viability.
They however noted that the Nigerian palm oil industry is very fragmented and dominated by numerous small-scale farm holders, which account for over 80 percent of local production, while established plantations account for less than 20 percent of the total market.
While advocating for establishment of plantation, the report stated that, the two largest producers – Okomu and Presco – individually hold a sizable market share, in terms of value – due to their combined capacity – compared to small-scale farmers.
“Local farmers produce roughly 80% of the total production, while using approximately 1.6 million hectares of land. The dominance of small farm holders in the palm oil market has resulted in low output compared to the country’s production potential. This is because local farmers’ manual harvesting techniques are outdated, which often results in significant wastages during the harvesting process.
“In Nigeria, lack of investment in palm oil extraction technology and technical incompetence/inadequate training has resulted in poor management of palm oil plantations over the years, causing some of them to cease operations. Despite this, there has been renewed interest in Nigeria’s palm oil market with the entrant of major food manufacturers via backward integration strategies into the upstream and midstream segments.
“For instance, in 2018, PZ Wilmar, a joint venture between PZ Cussons International UK and Wilmar International Ltd Singapore invested over $650 million in palm oil plantations and processing facilities. The company also planted almost 26,500 hectares of palm oil in Cross river state and installed a 65-ton per hour palm oil mill, which translates to an estimated annual capacity of ~40,000 tons. Also, in 2019, Dufil Prima, manufacturers of Indomie noodles and Power oil, finalized acquisition of 17,954 hectares of land in Edo State and a 1,040-hectare palm oil farm in Abia State,” the report stated.
Call for sustainable palm oil industry
As rightly stated by the PwC report, Nigeria being the fifth largest producer of palm oil in the world, needs to take the issue of sustainability in the palm oil industry very seriously. There is a need to make progress in the production of sustainable palm oil in the country.
Justifying the rationale for improving the sector, the PwC experts stated that, “The country’s large and rapidly growing population will continue to be a major driver of demand and so the implementation of sustainable practices in the industry is important. In recent years, there has been an increase in demand for palm oil in the country, with 90% of the demand coming from food related sources like household consumption and industrial use for food processing (noodles, margarines and biscuits).
“During the processing of palm oil, three major waste streams are generated: solid, liquid and gaseous waste. The solid wastes are generated from threshing, pressing and kernel cracking which are usually burnt thus, causing atmospheric pollution in the affected areas.
“Apart from the air pollution generated because of the burning of waste, the soil and water quality are also negatively impacted because of the discharge of Palm Oil Mill Effluents (POME) into the soil. This affects the pH level of the soil thus making the soil more acidic and unsuitable for cultivation of crops. In addition, during the rainy season, the POME becomes a breeding ground for insects and mosquitoes and when discharged into the waterways, it makes the waterways slimy thereby reducing water quality for everyday use and affecting the lives of aquatic organisms.”
Ownership structure of Presco and Okomu
Presco is a Public Limited Company (PLC) incorporated on September 24, 1991 and listed on the Nigerian Stock Exchange in 2002 after a successful initial Public offer (IPO) and operates as a major producer of specialty fats and oils.
The company is a fully integrated agro-industrial establishment with oil palm plantations, palm oil mill, palm kernel crushing plant and vegetable oil refining plant. Its corporate head office is at Obaretin Estate, km 22 Benin/Sapele Road, Ikpoba-Okha L.G.A Edo State.
Historically, sa Siat nv, a Belgium company, became involved in Presco in 1991 at which time 2,700 hectares were planted at Obaretin Estate, a palm plantation formally owned by the old Bendel State Government. Under the management of Siat, Presco acquired more land which include: 2,800 hectares of Cowan Estate at Ajagbodudu from Delta State Government; a total of 6,500 hectares at Obaretin Estate, Ologbo Estate of 13,100 hectares from Edo state government and other parties and the newly acquired 17,600 hectares in Orhionmwon LGA from Edo State Government to be planted with oil palm and rubber. With a total land bank of about 40,000 hectares in its holdings, Presco Plc is making giant strides in the Agro-business sphere in Nigeria
On the other hand, Okomu oil Palm was established in 1976 as a Federal Government pilot project aimed at rehabilitating oil palm production in Nigeria. At inception the pilot covered a surveyed area of 15,580 hectares of Government reserved forest reserve, out of which a net arable area of 12,500 hectares could be planted.
However, in 1990, the technical committee on Privatisation and Commercialisation (TCPC) privatised the company through an initial public offering and the shares were sold through an initial public offering (IPO)
The shares of Okomu Oil Palm Company Plc are 62.94 percent owned by Socfinaf S.A which is incorporated under the laws of Luxembourg and 30.06 percent by a diversified spread of Nigerian individuals and institutional shareholders. Other than Socfinaf S.A, no other shareholder holds more than 5 percent of the issued shares of the company.
