BY BAMIDELE FAMOOFO
The domestic economy has seen some notable improvement since it exited recession in the fourth quarter of 2020. However, the growth remains below potential and non-inclusive. The exchange rate has been volatile and the inflation rate has stubbornly maintained double digits for the better part of the last decade. As part of efforts to diversify its revenue base, the Federal Government of Nigeria has adopted a protectionist strategy.
The Federal Government has also taken the protectionist stance towards the agricultural sector in order to achieve self-sufficiency in food production. Some of the import substitution policies include the inclusion of oil palm on the 43 items restricted from accessing foreign exchange on the official market as well as access to concessionary loans from the CBN and BOI (Bank of Industry). Given that oil palm accounts for more than 80 percent of its revenue, Okomu is well positioned to benefit from these government policies.
In 2021, Nigeria’s palm oil production stood at 1.26mn MT, 37 percent lower than the consumption of 2.00mn MT. The demand gap, which is estimated at 740,000 MT, combined with the recent ban on palm oil exports by the world’s highest exporter, Indonesia, creates a massive opportunity for expansion.
Q1’22 revenue surges on higher crude palm oil prices
Following a plunge in global edible oil stocks and a decline in export surpluses, including the impact of war in Ukraine, crude palm oil prices surged by 23.90 percent during the first quarter ended March 31, 2022.
Okomu Oil palm Plc revenue has reacted accordingly. It surged by 63.27 percent to N20.49 billion in Q1’22 from N12.55 billion in the corresponding period in the previous year, driven largely by higher local sales which accounts for 92.14 percent of total sales. The uptick in the company’s local sales, which expanded by 66.64 percent, was despite operational challenges in the course of the review period. Similarly, revenue from exports grew by 31.97 percent.
Persistent top and bottom-line growth despite higher operating costs
During the period under review, Okomu Oil palm Plc faced elevated cost pressure due to sustained inflationary surge prompting cost of sales to spike sharply by 504.08 percent to N2.89 billion from N478.91 million.
Notwithstanding the accelerated increase in the company’s cost of sales, its profit margins remained high and strong. In Q1’22, the gross profit margin rose to N17.59 billion, 45.61 percent higher than N12.08 billion in the first quarter of 2021. Okomu oil palm Plc operating profit almost doubled to stand at 13.70 billion, rising by 95.99 percent compared to Q1’21. This was driven largely by a 23.43 percent fall in the company’s total net operating expenses.
Rising interest payments on long-term loans weighed heavily, resulting in a 470.16 percent increase in Okomu’s finance cost at N134.90 million and offsetting the 175.18 percent growth in finance income which reached N3.88 million in the period under review.
Nevertheless, profit before tax jumped by 94.69 percent to N13.57 billion, from N6.97 billion in the same period in 2021. In the same vein, profit after tax reached N9.50 billion, an 80.27 percent expansion compared to Q1’21.
“In Q1’22, the gross profit margin rose to N17.59 billion, 45.61 percent higher than N12.08 billion in the first quarter of 2021. Okomu oil palm Plc operating profit almost doubled to stand at 13.70 billion, rising by 95.99 percent compared to Q1’21”
Industry overview
Nigeria was a major player in the global palm oil market prior to the emergence of Indonesia as the largest global producer of palm oil. It is now currently the fifth largest producer, accounting for less than 2.0 percent of global production. However, Nigeria remains the largest producer in Africa (1.26mmt in 2021). Crude palm oil (CPO) exports were also one of Nigeria’s major exports and forex earners.
Domestic demand of CPO is about N9.88bn, far in excess of the domestic supply, making Nigeria a net importer of crude palm oil. The Nigerian palm oil industry has been a major beneficiary of the government’s protectionist policy, particularly as it is featured among the list of items banned from accessing foreign exchange from official sources.
This is consistent with the government’s policy to discourage the importation of products that can be produced locally. The oil palm industry can provide both unskilled and skilled employment for millions of Nigerians if there is increased focus on commercial large-scale production.
Most companies in this industry are currently focused on their expansion projects, and have been investing to increase their arable land area and milling facilities over the last four years to meet up with rising domestic demand amidst several business challenges.
The major business challenges remain unlevel playing fields, illegal importation of crude palm oil through Nigeria’s porous borders. Others include illegal taxes and tolls, insecurity and poor infrastructure in terms of road network, port delays and epileptic power supply. These have resulted in higher operating costs mainly from maintenance costs for generators and vehicles.
The most recent challenge, which is also affecting the global market, is the COVID-19 pandemic that has led to supply disruptions. The Nigerian Agricultural industry is highly fragmented with several small-scale farmers. However, the oil palm space is dominated by three main players – Okomu, Presco and PZ Wilmar.
The industry is categorized by hectares into: large estate plantations, medium and small-scale plantations and semi natural groves. Both Presco plc and Okomu Oil palm plc are classified as large estates plantations, and are the only two companies listed on the Nigerian Stock Exchange. Since 2021, leading global producers of palm-oil have been faced with multiple production challenges including labour shortages in Malaysia.
This flooding in parts of Malaysia as well as COVID-19 related logistics constraints have resulted in supply tightness, which has been stoking palm oil prices. Other factors including higher energy prices have also provided support to palm oil prices, due to its usage in biofuels. Owing to this, the global oil palm market is expected to strengthen in the short term on growing Chinese demand and rising transition to renewables.
Company overview
Okomu Oil Palm Plc, is an integrated agricultural company with oil palm plantations, mills, crushing plants and oil refining plants. Its major sources of revenue are income from sales of palm oil and rubber production, while revenue from services remains insignificant. The company started out as a Federal Government pilot project in 1976, before becoming incorporated in 1979 as a limited liability company. It began infrastructural developments at the end of 1989, when its 5,055 hectares (ha) land was planted. Okomu has grown to become a leading oil palm company in Nigeria. It is a subsidiary of the Socfina Group, and benefits from its main shareholder Socfinaf S.A. This is a company based in Luxemburg that brings almost a century of sound technical industry knowledge in the cultivation of oil palm and rubber plantation.
Governance structure
The Board is chaired by Gbenga Oyebode, while the Managing Director is G.D. Hefer. Most of Okomu’s directors have long years of service to the company, and also serve concurrently as members of other companies, but not companies that operate similar businesses to Okomu that could possibly create conflict of interest.
Bulls say:
• Leading player in the Nigerian oil palm market
• Diversified revenue stream (addition of service revenue stream and increased investment in the rubber market)
• The growing demand for crude palm oil and its derivative products
• Favorable government policies towards the agricultural sector
• Strong market presence
• Multiple entry points and appeal to the market
• Land expansion initiatives to broaden the revenue base.
Bears say:
• High operating cost (epileptic power supply)
• High rate of smuggling
• Dilapidated infrastructure
• Intense competition from leading players such as Presco, PZ Wilmar, as well as international players like Olam
• Change in government policies could affect the competitiveness of companies in the agricultural sector, particularly the palm oil sector
• Persistent macroeconomic headwinds could dampen consumer demand for palm oil products
• Insecurity in palm oil producing states.
