Nigeria Agriculture Sector – FY’18 Earnings Preview: Weak Crude Palm Oil prices will pressure FY’18 PAT

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The Agriculture sector expanded by 2.5% y/y in real terms in the final quarter of 2018, with a particularly strong showing from Crop production. We attribute this to reduced violence across key food-producing regions as well as the effect of the harvest. Accordingly, we forecast decent volumes from listed Oil Palm producers in Q4’18 amidst continued expansion in production.

That said, with Global CPO prices falling 5% in the quarter and Rubber prices also moderating, we project a 12% drop in revenue for major Crude Palm Oil producers in Q4’18. Similarly, with average CPO prices falling 19% y/y, we foresee a 4% moderation in FY’18 topline across the two listed producers.

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Meanwhile, with the bulk of OKOMUOIL’s Cost of Sales and PRESCO’s Selling expenses seasonally featuring in the final quarter, FY’18 EBIT margin should moderate from the 50s to mid-40s.

Whilst both major producers tend to generally move in the same direction, we see a divergence in Interest expense, with PRESCO reporting a 34% y/y increase in FY’18 Net Finance Cost and OKOMUOIL reporting a nine times to drop in finance charges for the year. We attribute the higher PRESCO charges to generally higher Interest rates in the period as well as new loan acquisition. Meanwhile, the paydown of a €10 million SOCFINAF loan earlier in the year helped drive OKOMUOIL’s finance charges lower for the year.

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Although strong average CPO prices in 2016 and 2017 have supported PRESCO’s bottom line via Gains on revaluation of biological assets, we do not see this support in 2018 and project a Loss on revaluation due to lower average prices for the year.

Overall, driven by weaker toplines in 2018, we expect PAT figures across major Oil Palm producers to moderate 97% y/y for Q4’18 and 63% y/y for FY’18.

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