Presco Plc and Okomu Oil Palm Company Plc Nigeria’s biggest palm oil producers’ revenue and share price are rallying amid unmet product demand.
The share prices of both companies combined are up 80% YtD taking their market capitalisation to N413.938 billion as of November 17, 2023, compared to N294.895 billion at the beginning of the year. While Presco’s share price has gained 34.55%, Okomu is up 45.45%
The rally in shares can be attributed to the positive financial performances of the companies, product demand, market outlook and the market share enjoyed by the companies.
In 2022, Okomu Oil Palm recorded a year-on-year revenue growth of 58.64%, reaching N59.324 billion, compared to N37.395 billion in 2021.
Similarly, Presco Plc achieved a 75.13% year-on-year growth in revenue, reaching N83.056 billion in 2022. This performance significantly outpaces the companies’ five-year compound annual growth rate, averaging at 26.70%.
In addition to the increased global demand for palm oil driven by the Russia-Ukraine war, which significantly boosted revenue, the growth in revenue for these companies can also be attributed to higher product prices. According to Okomu Oil’s 2022 Chairman’s report:
- “Despite the ongoing instability, both within and outside the country, the commodity prices of both of our company’s products increased in 2022, which, to a degree, helped to offset the substantial inflationary increases being experienced by businesses in 2022.”
Specifically, Okomu Oil reported a 43% year-on-year increase in crude palm oil (CPO) prices and a 7% increase in rubber prices during the same period. These price increments played a significant role in contributing to the overall rise in revenue.
The companies have released their 9-month 2023 results, which show a continuation of the positive trend in both top-line and bottom-line growth, along with health profit margins.
During the nine months of 2023, Okomu reported revenue of N60.647 billion, surpassing its full-year 2022 revenue of N59.323 billion. Similarly, Presco reported revenue of N79.867 billion during the same period, about 93% of its full-year revenue for 2022.
With this consistent growth, there is a strong likelihood that both companies will exceed their 2022 performance in terms of revenue generation by the end of the year.
This is particularly beneficial for investors, especially those relying on dividends, as it is likely to spur growth in dividend payments.
Both companies have a track record of consistent dividend payments over the past five years, and they offered one of the best dividend yields in the NGX market last year.
As an early sign of this continuing trend, Okomu Oil and Presco Oil have already announced interim dividends of N4.50 and N2 per share, respectively, for the 2023 financial year.
A significant strength for both companies lies in the substantial local demand for their products. Local sales contribute to over 91% of their total revenue.
Despite a 40% increase in export sales for Okomu Oil in the first nine months of 2023, local sales continue to dominate, accounting for 91% of the total revenue.
In the case of Presco, the reliance on local sales is even more pronounced, constituting 100% of the total revenue.
In addition to the strong revenue performance, is that the companies have a high gross profit margin, averaging around 66%. This may reflect effective cost management.
For instance, Okomu Oil, in a statement, highlighted its efforts to control costs, including the utilization of a newly fully commissioned 5MW turbine as an alternative power source in 2022, which resulted in the generation of over 44% of the power needed in the company’s primary estate, and that contributed not only to cost efficiency but also reducing the company’s carbon footprint.
While a healthy gross profit margin can indeed suggest effective cost management, it is important to consider other factors, such as the demand-supply dynamics in the market.
In a situation where there is a supply shortfall, companies may have the ability to command higher prices for their products, contributing to an elevated gross profit margin.
In this context, the high gross profit margin for both companies may not solely be attributed to effective cost management but also to favourable market conditions, where the demand for their products exceeds supply.
There seems to be a significant disparity between demand and production.
According to data from the United States Department of Agriculture (USDA), Nigeria’s palm oil production reached 1.4 million metric tons in 2022/2023.
However, local consumption was approximated to be around 2.1 million metric tons, resulting in a shortfall of 0.7 million metric tons.
Given an average yield of 0.5 tons per hectare, according to USDA data, producing this quantity would necessitate an estimated 1.4 million hectares of land.
Presently, the combined plantation land of the two largest producers totals 58,489 hectares. Okomu possesses 19,060 hectares of oil palm, and Presco holds a plantation land bank of 39,429 hectares.
This disparity underscores a potential inadequacy and signals the need for expansion and investment, encouraging both the existing major producers and potential new entrants to explore these growth opportunities.