Investors in companies operating in the oil palm sector of the Nigerian economy have very bright prospects of reaping high returns going forward.
This was the submission of analysts at Afrinvest (West Africa) in a special report on the oil palm sector.
According to the report, oil palm is currently the most consumed edible oil in the world with Malaysia and Indonesia being the top major producers. Indonesia (41.5 million metric tonnes) and Malaysia (39.5 million metric tonnes) accounted for an average of 80.1 per cent of global production between 2016 and 2018.
Other leading producers of oil palm as at 2018 included Thailand (2.9 million metric tonnes), Colombia (1.5 million metric tonnes) and Nigeria (1.0 million metric tonnes).
The report pointed that in Nigeria, oil palm production and export historically contributed substantially to the country's external reserves and agricultural gross domestic product (GDP), as palm oil and palm kernels exports were between 15 per cent and 20 per cent of the country's total exports.
It added that 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 of Nigeria (CBN)'s list of 42 foreign exchange (FX) excluded items.
This policy, when introduced in 2015, according to report, led to a surge in oil palm prices as local demand for crude palm oil (CPO) soared while importation and total industry supply tapered.
It further noted that based on this, listed companies Okomu Oil Palm Plc and Presco Plc witnessed notable and faster pace of improvements in revenues and profitability even as growth in production expansion has been slower.
"Also, we highlight that listed companies have focused on expanding production, especially over the last three years by investing in increasing total land area under cultivation, expanding milling and refining facilities to meet up with expected additional output.
"We hence expect both companies to record continuous revenue and profitability growth over our forecast period," the report noted.
According to Afrinvest, based on their understanding of the sector, it was their view that the oil palm industry is keenly positioned to soar further over the coming years as investments in expanding milling and refining capacity of listed sector players crystallise.
"Also, the sector, which has ridden on positive government support since 2015, based on oil palm import restrictions introduced by the CBN has provided premium pricing opportunity for players. "Similarly, the federal government posture towards supporting agriculture has enabled low cost capital expenditure financing by industry participants compared with other sectors in Nigeria," they added.
Afrinvest explained that they believe that Okomu Oil Palm, where we expect oil palm and rubber trees on about 8,809 hectares and 1,989 hectares to mature within our forecast period presents an outlook on additional output.
"Presco, which has chosen to specialise in the production of speciality fats and oil , enjoys premium pricing on its products. We opine that the company's profitability has been constrained by the weak capacity of its refinery and fractionalisation plant which has a capacity of only 100.0 CPO MT/day.
"Our discussion with management revealed that expansion in the capacity of this plant to 500.0 MT/day would be completed in Q4:2019 and hence presents an upsurge in output and company's profitability above sector comparable," they said.