Palm oil makers’ profits slump to five-year low on supply glut

Palm oil makers’ profits slump to five-year low on supply glut

Palm oil makers’ profits slump to five-year low on supply glut

The relative stability in the foreign exchange (FX) market which has led to cheaper imports has dealt a blow to oil palm producers as their earnings slumped the most in five years.
Hitherto, firms like Okomu and Presco made money when the regulator imposed ban on importers from accessing foreign exchange for certain product including palm-oil and textiles in June 2015.
However, they started losing market share when the introduction of the Importers’ and Exporters’ (I & E) Window in June 2017, which strengthened liquidity in the foreign exchange market and paved the way for customers to import product.
“Foreign exchange has been more available compared to the past and the importers of agricultural input that used to patronize these firms during scarcity now have alternatives,” said Kayode Tinuoye, Fund Manager for Institutions and Private Clients at United Capital Asset Management, Limited.
“The weaker the naira the more revenue they can make from exports, but when the currency stabilizes, import will become cheaper. So exports are not as lucrative as it used to be,” said Tinuoye.
For the First six months through June 2018, after tax profits for the 2 major palm oil producers that have reported results fell by 28.15 percent to N3.98 billion from N5.55 billion the previous year.
Combined sales were down 2.78 percent to N24.59 billion in the period under review, this compares with 70.25 percent growth in the 2017 periods. The market reacted to the weaker than expected results as the share price of major palm producer’s fell.
This is in stark contrast to last year when both companies were star performers on the floor of the exchange as investors reacted positively to the slew of earning growth. Okomu’s shares have shed 3.27 percent since the start of the year while it dropped 10 percent to close at N74.70 on the floor of the exchange.
Presco’s shares have dropped 22.87 percent since the start of the year. Experts attribute slow sales to weak consumer income, supply glut brought on by illegal shipments of products to neighbouring West African countries and a plunge in global CPO prices.
“FEWSNET is reporting an 11% quarter on quarter QoQ deceleration in refined CPO prices. This is in consonance with plunging global CPO prices—an off shoot of widening surplus in the global CPO market,” ARM research said in a July 31 note to clients. Domestic CPO prices have faced a downtrend in line with global CPO prices, with prospect of widening CPO surplus.
The USDA forecasts a 51 percent jump in global surplus to 4.9 million MT) dragging global CPO prices with pass through effect on domestic CPO prices down -27% YoY to around N91,969.44/MT, according to ARM.
“There are fears the situation may get worse if the government gives import waivers “to some people for political reasons” ahead of 2019 general elections, as happened in the past,” said Okomu Chief Executive Officer Graham Hefer. Oil palm firms were unable to turn each naira generated in sales into higher profit as margins dropped.
Okomu’S net profit margins fell to 45.83 percent in the period under review. Presco saw a drop in net profit margin to 34.19 percent in June 2018 from 43.29 percent the previous year.
Okomu, which currently mills 30 metric tons of palm oil per hour, plans to double its capacity by 2020 on the completion of a $50 million plant. The company operates 33,000 hectares (82,000 acres) of oil palm and rubber trees, according to its website.
Presco trades at a current price to earnings (P/E) ratio of 10.8x versus 8.0x for main peer Okomu.
“Okomu will be in a better position to generate positive earnings when yields at its plantations start to pick up,” said Damilola Olupona, analyst at Investment firm Asset & Resource Management.

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Ezeadichie Onyeka Michael is the Co-Founder of Haelsoft, a Professional Services Company in Nigeria that provides Information and Technology Services for small and big size companies in Nigeria(Africa). He is an Entrepreneur and Venture Capitalist with Expertise in Web Technology and Digital Marketing. He has developed & Implemented Digital Marketing Strategies(Campaigns) for top brands across sectors in Finance, Telecommunication, Ecommerce who operate in the African market. His professional experience includes key roles at Google Business Group(Nigeria), Google Women on the Web (Nigeria), Edubridge Consultant and Wild Fusion where he has trained over 500 Entrepreneurs on how to use various Web Technology products to succeed online. Customer centricity, User Experience, Conversion optimization are 3 pronged framework he applies around the often-frenetic world of web analytics to ensure that clients stay competitive in the market. He believes that investing in talent is the key to long term success for brands across Nigeria (Africa).

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