nigerian palm oil sector - nigeria’s no1 economy and ... · pdf fileokomu oil palm plc...

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Stock (rating)*

Price (N)

Price Target

(N) Potential. Gain/loss

Okomu Oil (N) 38.0 38.4 1.0%

Presco (N) 40.0 44.0 10.1%

Source: Bloomberg, FBNQuest Research *OP: Outperform, N: Neutral: UP: Underperform

EQUITY RESEARCHNigeria | Agriculture | Palm oil | Sector update | 04 October 2016

Nigerian palm oil sector Still a promising growth story

Favourable prospects for the Nigerian palm oil sector... With a supply gap of about 500,000 metric tonnes (mt) and fertile arableland for cultivation, the untapped potential of the Nigerian palm oil sector is large. The main producers, Okomu Oil and Presco, have continued to increasetheir plantation area and are on course to meet their 2018 and 2020 targetsof growing their respective land area to 12,000 hectares (ha) and20,000ha. In 2015, mature land constituted about 95% of the total land area for both producers combined, growing by 10.8% for Okomu and 46.2% for Presco. Total crude palm oil (CPO) produced during the year increasedby 12% to 35,600 tonnes (te) and 10% to 39,328te for both companiesrespectively. We expect both companies to surpass their targets by 2017. For 2016E specifically, we forecast sales growth of 24.5% and 38.8% for Okomu and Presco, and PBT growth of 62.7% and 43.7%.

...supported by recent government policy A weak macroeconomic environment in Nigeria has put significant pressureon the naira. This has put competitors at a significant disadvantage to domestic producers – and that is assuming the competitors can source fx successfully. Sourcing of fx has become difficult because the central bankhas banned importers of CPO (along with several other products) fromaccessing fx at the interbank market. As such, users of CPO such as FMCGcompanies are patronising domestic producers more, at the expense ofimporters of palm oil. This partly explains why Okomu and Presco recordedhealthy growth in sales and PBT in H1 2016: on average, sales grew by 55.8% y/y while PBT grew by 123.7% y/y. The fx sourcing issues for importers hascarried on into H2 2016.

Rubber not providing as much benefit Presco is yet to start producing rubber as it seeks to diversify away frompalm oil like Okomu has done. For Okomu, although rubber brings in desiredfx (since it is largely exported), its contribution to the topline has decreasedin recent times due to unfavourable pricing in international markets. Theproduct now accounts for 20% of sales compared with 40% in 2011. Pending a recovery in prices, we expect rubber to continue to be a drag on Okomu’sperformance. As for Presco, although it has spare land for cultivation andmore land is being acquired, planting of rubber has not commenced. We do not expect any contribution from rubber to Presco’s sales in the near termgiven that it takes 7 years for planted rubber to reach its productive phase.

Sector outperforming the broader market Having gained an average of 27.1% in 2015 (vs -17% for the NSEASI), the palm oil companies have outperformed the index year-to-date. Okomu and Presco have appreciated by 21.2% and 25.4% respectively (vs -1.4% ytd for the NSEASI). The companies’ fundamentals are also supportive. While Okomucurrently trades on 2016E P/E multiple of 8.7x for 1.9% in 2017E, Presco is trading on 10.6x for EPS growth of 4.3% in 2017E. These compare with around 40.1x on average for the fast moving consumer goods companiesunder our coverage, and 17.4x, 33.0x and 26.2x for international peers in Indonesia, Malaysia and Singapore. From current levels, we see potential upside of 5.6% on average for both companies. We rate both stocks Neutral.

Nigeria | Equities | Agriculture | Palm oil sector update | Still a promising growth story

4 October 2016 2

[Notes]


4 October 2016 3

Contents Sector valuation and recommendation 5

H1 2016 recap 7

Increased land usage paying off 7

Nigeria specific drivers 9

Weak macroeconomic environment 9

Agriculture’s role and potential in the economy 10

FG’s diversification plan and focus on agriculture 11

Palm oil in focus 14

Global palm oil industry 14

Pricing 15

Industry structure and dynamics in Nigeria 16

Outlook – H2 2016 and beyond 17

Strategy and expansion plans of key players 17

Positive expectations for sales and earnings 18

Company financials (FBNQuest Coverage universe) 19

Valuation methodology 21

Analyst(s) certification and disclosures 21

Prices of securities and index levels in this report are as of close of business on Thursday, 29 September 2016 unless otherwise stated. N/US$ conversions are based on a rate of 315.25.


4 October 2016 4

[Notes]


4 October 2016 5

Sector valuation and recommendation Over the last 5 years, Okomu Oil (Okomu) and Presco have outperformed the NSE All Share Index (ASI) except in 2014. Although the ASI shed -16.1% that year, both stocks performed significantly worse, averaging -23.2%. The fall in global Crude Palm Oil (CPO) prices by -16.3% y/y weighed. Both companies rebounded in 2015, outperforming the index by 36.9% (Okomu) and 52.0% (Presco).

Share price performance vs the ASI

Share price performance vs NSE ASI (rebased to 100)

Source: Bloomberg, FBNQuest Research Source: Bloomberg, FBNQuest Research

While the ASI has shed -1.4% year–to-date, Okomu and Presco have gained 21.2% and 25.4% respectively. The scarcity of fx and recent government policies have had a positive impact on both companies. Palm oil was listed among the 41 items that the central bank banned from the official interbank fx market last year. The fx scarcity has made imports more expensive; as such, local firms which use palm oil as a raw material now rely on domestic suppliers. This has helped the palm oil companies to continue ramping up production. H1 earnings for both companies were strong. On average, PBT grew by 123% y/y on the back of strong unit volume growth as well as improvement in gross margin through cost containment measures. CPO produced grew by 12.3% and 10.1% in 2015 for Okomu and Presco respectively. Following their H1 2016 results, we raised our EPS estimates over the 2016-17E period for both companies by 12.6% and 20.9% on average.

ASI and share price performance summary

Company Price (NGN) 52Wk high 52Wk low 1M (%) 3M (%) 6M (%) 12M (%) YTD (%) 2015 (%)

Okomu Oil 38.0 39.9 26.3 5.6 22.5 27.3 35.7 25.4 19.5

Presco 40.0 45.3 29.7 -11.7 8.1 15.6 30.9 21.2 34.7

Average 42.6 28.0 -3.1 15.3 21.5 33.3 23.3 27.1

Source: Bloomberg, FBNQuest Research

On a relative valuation basis, Presco currently trades on a 2016E P/E multiple of 10.6x for EPS growth of 4.3% in 2017E. Okomu is trading on 2016E P/E multiple of 8.7x for 1.9% in 2017E. Both companies are trading at a discount compared with overseas peers. While Indonesian peers are trading on an average 2016E P/E of 17.4x, Malaysian and Singaporean peers are trading on 33.0x and 26.2x respectively.

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In absolute terms, based on our fair value estimates, Presco shows an upside potential of 10.1% to our N44.0 price target. Okomu is fairly valued at N38.4. We have a Neutral rating on both stocks.

Relative valuation: Nigerian companies vs overseas peers

Company Poducts Price Currency

Mkt Cap (USD,

m) Current PE (x)

1 yr fwd P/E (x)

1 yr EPS growth

(%)

1 yr fwd EV/EBITDA

(%)

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OKOMU OIL PALM PLC PALM OIL, RUBBER 38.00 NGN 115 8.74 8.58 1.88 5.83 2.74

PRESCO PLC REFINED PALM OIL 40.00 NGN 127 10.58 10.14 4.31 4.54 2.14

121 9.66 9.36 3.09 5.19 2.44

Company Products Price Currency

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m) Current PE (x)

1 yr fwd P/E (x)

1 yr EPS growth

(%)

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(%)

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(%)

PP LONDON SUMATRA INDONES PT PALM OIL, RUBBER, COCONUT 1,525.00 IDR 802 20.12 14.30 -32.09 7.63 2.13

SAMPOERNA AGRO TBK PT PALM OIL 1,950.00 IDR 284 14.77 11.90 -27.22 6.88 1.84

543 17.45 13.10 -29.66 7.25 1.99


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m) Current PE (x)

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(%)

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(%)

KUALA LUMPUR KEPONG BHD PALM OIL, RUBBER, COCOA 24.04 MYR 6,216 24.38 22.40 -12.24 14.27 1.98

FELDA GLOBAL VENTURES PALM OIL, RUBBER, SOYBEAN 2.42 MYR 2,143 78.06 37.81 -93.07 12.22 0.81

UNITED MALACCA BHD OIL PALM , RUBBER 5.69 MYR 289 20.84 17.78 25.21 10.52 5.23

IJM PLANTATIONS BHD OIL PALM 3.56 MYR 761 26.37 21.58 -74.39 14.68 5.10

SARAWAK OIL PALMS BERHAD OIL PALM 3.76 MYR 403 15.35 13.53 -23.51 6.94 0.57

1,963 33.00 22.62 -35.60 11.7 2.74


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m) Current PE (x)

1 yr fwd P/E (x)

1 yr EPS growth

(%)

1 yr fwd EV/EBITDA

(%)

1 yr fwd EV/SALES

(%)

WILMAR INTERNATIONAL LTD PALM OIL 3.22 SGD 14,928 16.41 12.51 -8.29 11.29 0.63

FIRST RESOURCES LTD PALM OIL 1.85 SGD 2,151 21.56 14.45 -37.81 9.50 4.31

2,771 26.21 18.36 -31.70 10.26 2.48

Source: Bloomberg, FBNQuest Research


4 October 2016 7

H1 2016 recap

Increased land usage paying off Domestic palm oil companies have posted impressive performances so far in 2016, similar to what we saw in 2015. Although CPO is still smuggled into Nigeria from neighbouring countries, the trade has come under pressure because of fx sourcing challenges. Nigeria’s supply deficit, estimated at 500,000 tonnes (te) per annum, is still significant. Okomu and Presco have been able to boost their revenue and earnings by aggressively expanding their plantations and increasing volumes. Okomu’s sales grew by 12.5% y/y to N9.7bn in 2015 while PBT and PAT advanced by greater margins of 52% y/y and 85% y/y to N2.9bn and N2.7bn respectively. Its total land area for palm oil production increased by 9% in 2015 to 10,624ha. Total production of CPO amounted to 35,600te, 12% higher than the total CPO produced in 2014. For Presco, 2015 sales of N10.4bn grew by 14.3% y/y as unit volumes and prices increased by 13% y/y and 3% y/y in 2015. However, PBT and PAT declined by -46.7% y/y and -55.0% y/y to N4.2bn and N2.3bn respectively. Restatement of the prior year’s result by the company resulted in a significant upward review to biological assets gains (around N4.4bn) and contributed to the y/y decline in profits. Its total land area increased by 18% to 16,650ha in 2015, out of which 92% was mature land. CPO produced increased by 10% y/y to 39,328te.

CPO production (2015)

Total land area (ha) Mature land area (ha) Total FFB produced (te) CPO produced (te)

Okomu Oil* 10,624 9,960 162,186 35,600

Presco 16,650 15,356 176,494 39,328

Total 27,274 25,316 338,680 74,928 *Data excludes rubber

Source: Company data,FBNQuest Research In June 2015, the Central Bank of Nigeria (CBN) issued a directive in which 41 items (of which CPO was one) were banned from accessing foreign exchange at the interbank market due to scarcity of dollars. The rationale behind the ban was that domestic production of these items needed to be encouraged. Since then, importers of CPO have been forced to source their fx from alternative and more expensive channels. The devaluation of the naira, first from c.N165 to N199 last year, and then to c.N280 in June worsened their plight. These developments have benefitted the domestic palm oil producers: Okomu and Presco grew their topline by 51.2% y/y and 60.5% y/y respectively in the first half of 2016. Even more significant is the gross margin expansion for both companies. H1 2016 gross margin expanded by 591bps y/y to 91.4% for Okomu as cost savings measures proved significant. Similarly, Presco’s gross margin expanded by 711bps to 63.3%. The company enjoyed scale benefits from the completion of its biogas plant. With respect to earnings, Okomu’s H1 2016 PBT margin growth of 897bps y/y to 51.8% was limited by a 49.0% y/y rise in operating expenses while a 578.2% y/y increase in biological asset revaluation gain helped boost Presco’s PBT margin by 2,161bps y/y to 54.9%. Presco however recorded fx losses on capex, amounting to N717m in Q2 (vs N17m in Q1), due to the adoption of a flexible exchange rate regime by the CBN.


4 October 2016 8

Y/y growth in revenue, margin and earnings trend

H1 2016 y/y Sales growth

H1 2016 y/y Gross margin

growth H1 2016 y/y PBT growth

H1 2016 y/y PBT margin

growth H1 2016 y/y PAT growth

Okomu Oil 51.2% 591bps 82.8% 897bps 95.2%

Presco 60.5% 711bps 164.7% 2,161bps 152.9%

Average 55.8% 651bps 123.7% 1,529bps 124.0%

Source: Company data, FBNQuest Research Compared with our estimates, Okomu’s sales were ahead by 41% while PBT and PAT came in much stronger. The main reason for the wide PBT variance was the stronger-than-expected sales growth; total costs (cost of goods sold + operating expenses) were in line with our forecasts. Q2 sales were ahead by 21%, while PBT and PAT came in ahead by 39% on average. As for Presco, Q1 2016 sales and PBT beat our forecasts by 36.8% and 124.8% respectively. Q2 sales were ahead of our estimate by 33%, while PBT and PAT (both excluding biological asset revaluation gains) came in ahead by 78% and 60% respectively. We expect the palm oil companies to continue to increase volumes rapidly. Both Okomu and Presco are on track to meet their targets of growing land area to 12,000ha by 2018 and 20,000ha by 2020 respectively.

Q2 2016 results: Actual vs. FBNQuest Research estimates (N millions) Okomu Oil

Q2 2016 H1 2016

Actual Y/y Q/q FBNQuest

est.

Act. vs FBNQuest est

(%) Actual Y/y FBNQuest

est.


(%)

Sales 4,219 64.3% 26.9% 3,502 20.5% 7,545 51.2% 6,828 10.5%

Gross profit 4,099 101.5% 46.6% 2,915 40.6% 6,895 61.6% 5,711 20.7%

-gross margin 97.2% 1793bps 1309bps 83.2% 1394bps 91.4% 591bps 83.6% 776bps

PBT 2,275 138.5% 39.1% 1,576 44.3% 3,909 82.8% 3,211 21.7%

-PBT margin 53.9% 1677bps 476bps 45.0% 890bps 51.8% 897bps 47.0% 479bps

PAT 1,999 147.2% 25% 1,497 33.5% 3,595 95.2% 3,093 16.2%

-PAT margin 47.4% 1588bps -60bps 42.8% 463bps 47.6% 1074bps 45.3% 234bps

Presco

Q2 2016 H1 2016

Actual Y/y Q/q FBNQuest

est.


(%) Actual Y/y FBNQuest

est.


(%)

Sales 4,337 71.3% 36.3% 3,255 33.3% 7,518 60.5% 6,436 16.8%

Gross profit 2,757 115.3% 37.6% 1,888 46.1% 4,761 80.7% 3,891 22.3%

-gross margin 63.6% 1301bps 60bps 58.0% 557bps 63.3% 711bps 60.5% 286bps

PBT 2,329 233.1% 29.6% 1,080 115.7% 4,127 164.7% 2,877 43.4%

-PBT margin 53.7% 2609bps -279bps 33.2% 2052bps 54.9% 2161bps 44.7% 1018bps

PAT 1,613 154.3% 15% 756 113.4% 3,012 152.9% 2,155 39.8%

-PAT margin 37.2% 1215bps -678bps 23.2% 1397bps 40.1% 1465bps 33.5% 658bps *FBNQuest PBT estimate excludes biological asset revaluation gains or losses

Source: Nigerian Stock Exchange (NSE), FBNQuest Research estimates


4 October 2016 9

Nigeria specific drivers

Weak macroeconomic environment Nigeria’s GDP growth exceeded 4% each year from 2000 through to 2014 but slumped to just 2.8% last year under the many pressures created by the oil price slide. The country slipped into a recession following two successive GDP contractions by -0.4% y/y in Q1 2016 and by -2.1% in Q2 2016. Population growth slowed to 2.3% in 2012 according to CBN data. The historical solid GDP growth in the past has been driven by the non-oil sector. It stems from reforms introduced by the second Obasanjo administration (2003-07) and in some sectors such as agriculture by the Jonathan presidency (2011-15), favourable weather conditions, the trickle-down from high oil prices (until June 2014) and low interest rates in developed economies. Before Q2 2016, non-oil growth had averaged 4.4% y/y over eight successive quarters, admittedly on a downward trend due to pressures on household budgets. The falling oil price, the squeezing of government spending and the emergence of public salary arrears have together taken the shine off the story of robust private demand. In Q2 2016, non-oil growth contracted by -0.4% y/y. In contrast to the non-oil economy, before Q2 2016, oil GDP contracted by an average of -2.6% y/y over eight successive quarters. However, the sector shrank by a staggering -17.5% in Q2 2016. Underinvestment by the unincorporated joint-ventures (of the NNPC and the oil majors), the vacuum created by the non-passage of the PIB and the steep increase in production leakages all contributed to this disappointing performance.

GDP, oil and non-oil growth (Y/y growth)

Source: National Bureau of Statistics (NBS), FBNQuest Research Consumption growth, a key driver of GDP growth, has slowed as a result of insecurity in the north east, fiscal pressures arising from the slide in the oil price, currency devaluations (in November 2014, February 2015 and June 2016), and dull global growth. Unfortunately for Nigeria, the developed economy with the best growth prospects is the US, which has become self-sufficient in oil production.

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Perhaps the best evidence of the weakness of the non-oil economy is that trade, the second largest sector of the economy, was flat in Q2 and declined by -2.6% q/q. Trade is the most reliable measure of demand across all income levels. The manufacturing sector contracted by -3.4% y/y. The largest segment of manufacturing (food, beverages and tobacco) shrank by -5.5% y/y. Its underperformance relative to most other segments may be traced to its high import requirement. The data for the diverse services sector do not send any clear signals. Financial and insurance posted double-digit contraction y/y for the second successive quarter. Public administration, transport and storage, and real estate all shrank by more than -5.0% y/y. The performance of these sectors more than outweighed the modest growth y/y posted by education, information and communications, and professional and technical services.

Agriculture’s role and potential in the economy Agriculture continues to play a major role in Nigeria’s economy. The sector employs about 70% of the country’s labour force and provides about 14% of non-oil earnings. Its recent record for job creation is poor. The NBS data series shows that it contributed just 11% of the total number of formal jobs created in Q3 2015. As far back as the 1960s, agriculture’s contribution to GDP was as high as 64%, but fell to 20% in the late 1970s. Thereafter, the ratio picked up and rose steadily to reach around 40% in the early 2000s but settled at 23% in 2015. Growth-wise, the sector slowed to 3.7% y/y in 2015 from 4.3% the previous year. This year, the sector grew by 3.1% y/y Q1 2016 and 4.5% y/y in Q2 2016.

Agriculture contribution to GDP

Agricultural GDP growth (Y/y growth)

Source: Central Bank Nigeria (CBN), FBNQuest Research Source: National Bureau of Statistics (NBS), FBNQuest Research

The NBS commentary cited lower crop output due to the insecurity in the north east as an explanation for the slower growth. In Q1 2016, crop production contributed 89% to agricultural GDP, livestock 7%, fishing 2% and forestry 1%. Palm oil accounts for less than 2% of crop production, implying a GDP contribution of around 1.5%. This figure compares with around 4.5-6% for Malaysia and Indonesia. The security challenges have driven away farmers, transporters and middlemen. Nigeria has over 84 million hectares of arable land, out of which only about 40% is cultivated. It also has significant manpower, with a population of over 170 million people. The country has about 230 billion cubic meters of water with a coastline of 853km which supports artisanal fishing. Data from CBN show that artisanal production

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accounted for around 76.6% of the 990,250 tonnes of fish produced in 2014. The country has abundant and reliable rainfall in over two thirds of its territory and has some of the richest natural resources for agricultural production in the world. As a result of poor production, Nigeria relies mostly on imports to fill its food demand. Based on estimates from the ministry of agriculture, the supply gap for rice, fish, tomatoes and wheat is 4 million metric tons (mmt), 1.9mmt, 1.4mmt and 4.6mmt respectively. According to the FGN’s Agriculture Promotion Policy, rice imports for example still exceed US$1bn per annum. Due to the devaluation of the naira, imports have become even more expensive. In February last year, the naira fell to N199/US$ from N165. It remained at that level until June 2016 when it was floated. The official rate is currently around N305. However, the parallel market rate, which is more reflective of the prevailing operating environment, is already above N470/US$.

US$/NGN Exchange rate trend

Source: Central Bank of Nigeria (CBN), Abokifx, FBNQuest Research Many companies such as PZ Cussons Nigeria, Flour Mills of Nigeria and Honeywell Flour Mills are trying to backward integrate to tackle the raw material sourcing challenges they are facing. Others (Unilever Nigeria and the brewers) plan to increase the proportion of their raw materials sourced locally. While we welcome these plans, generally speaking, the pace is rather slow. The target of rice self-sufficiency, for example, appears to have slipped from 2017 to 2018. While tariffs have been utilised to discourage imports, one of the unintended consequences is that they promote smuggling through Nigeria’s porous borders. The Nigeria Customs Service (NCS) recently reintroduced its ban on the importation of rice through land borders following reports of an upsurge in rice smuggling. According to the NCS, there has been a pick-up in seizures since January 2016. Similar to what we observe for palm oil, there has been a corresponding increase in demand for locally produced rice. On a positive note, the ministry of agriculture has expressed its commitment to improving rice productivity. Local rice production has been projected to hit 2.7 mmt in 2017. Recent reports suggest that Dangote Industries Limited (DIL) is preparing for its first harvest after a US$1bn investment in rice.

FG’s diversification plan and focus on agriculture The previous administration of President Goodluck Jonathan favoured (and developed) import substitution programmes for agricultural products so as to slash the country’s food import bill. The Buhari government’s policies for the sector are similar: to develop

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4 October 2016 12

sustainable policies for agricultural products, invest more in research and tackle smuggling. The government has repeatedly stated that diversification of the economy away from crude oil is one of its main priorities, with agriculture as a focus sector. In July 2016, the agriculture ministry released a new roadmap for the sector entitled the Agriculture Promotion Policy (APP). The target of the APP is to double the growth rate of agriculture against overall GDP growth on an annual basis from 2016 to 2020. The new policy aims to build upon the successes of the Agricultural Transformation Agenda (ATA) under the previous administration. The ATA brought about reforms in input delivery. The Growth Enhancement Support (GES) Scheme, agricultural financing, value chain development, including the Staple Crop Processing Zones, and farm mechanisation yielded abundant gains to farmers and the country at large. President Buhari has indicated that the GES scheme would be maintained. According to the ministry of agriculture, national food production grew by 21 mmt between 2011 and 2014, leading to a sharp reduction in food imports. In addition, Nigeria’s food import bill declined from N3.19trn in 2011 to N635bn in 2013. To unlock the sector’s full potential, the APP has prioritised areas such as access to land, soil fertility, storage, agribusiness investment development and access to finance amongst others. The FGN aims to partner with private investors to boost productivity in nine agriculture related products - rice, wheat, maize, fish (aquaculture), dairy milk, soya beans, poultry, horticulture (fruits and vegetables) and sugar. Lately, the FG signed a memorandum of understanding (MoU) with Arla Foods for the development of the dairy sector in Nigeria. The firm aims to ensure that the quality of milk produced locally meets international standard, as it also develops the supply chain. About 200 farmers are expected to be trained in the first year. In 2015, the President launched the Anchor Borrowers’ Programme (ABP), an initiative of the Central Bank of Nigeria (CBN), which aims to link over 600,000 smallholder farmers with reputable large-scale processors with a view to increasing agricultural output of rice and wheat, and improving capacity utilisation of integrated mills. In addition, the ABP will complement the GES Scheme by graduating GES farmers from subsistence farming to commercial production. A sum of N40bn has been set aside for farmers in the participating states at a single-digit interest rate of 9%. This is in addition to the Nigeria Incentive-Based Risk Sharing for Agricultural Lending (NIRSAL) which the CBN introduced in 2010 to boost agricultural industrialisation with about N450bn funding. NIRSAL recently signed an MoU with the Bank of Industrial (BoI) to facilitate credit facilities for smallholder farmers. Aside these, some state governments are taking initiatives to enhance agriculture production as well as to increase earnings and boost job creation within their states. The Anambra state government has started exporting vegetables. The CBN, under the ABP, has disbursed N150m, improved rice seedlings and pesticides to farmers in the state. Similarly, the Abia state government is reported to have acquired 8,000ha of land for palm oil production. Kaduna state is home to 3 large ongoing agricultural projects. Vicampro Farms Limited is constructing a 10,000ha potato farm and processing plant worth US$120m in the state. In addition, Olam is investing US$150m to build a poultry and feed mill while the Dangote Group will invest US$10m to establish a 7,000ha tomato production plant.


4 October 2016 13

With regards to palm oil specifically, the FG’s long term goal is to return Nigeria to being a net exporter of palm oil. PZ Wilmar signed an MoU with the Nigerian Institute for Oil Palm Research (NIFOR) in 2016. The MOU covers research and development, capacity building and knowledge sharing on innovative ways of driving the palm oil industry forward. Finally, one of the social intervention programmes planned by the FG involves feeding primary school children between the ages of 5 and 13 years under the National School Feeding Programme. To achieve this, it has contracted NASCO Foods Limited to produce biscuits for an estimated 25 million children. Since palm oil is an ingredient used in making biscuit, we expect this programme to provide a boost to the domestic palm oil industry.


4 October 2016 14

Palm oil in focus

Global palm oil industry Palm oil remains the cheapest and most edible vegetable oil globally. The oil palm tree produces 4.95 te of edible oil per hectare (ha), six times more than the rapeseed tree, the next highest. Aside its use as cooking oil, it is also used in the manufacture of soaps and detergents, cosmetics, pharmaceuticals, biscuits, biodiesel among others. Every part of the palm tree has alternative uses.

Global palm oil production vs other vegetable oils

Global edible oil consumption (billion te)

Source: USDA, FBNQuest Research Source: USDA, FBNQuest Research

Data from the United States Department of Agriculture (USDA) show that India, Indonesia, the European Union (EU), China and Pakistan are the top five consumers of palm oil globally. Combined, they account for approximately 51% of global consumption. Egypt and Nigeria are the largest consumers in Africa. Similarly, India, the EU, China and Pakistan are the largest importers globally while Egypt tops the chart for Africa, with its imports accounting for 97% of consumption in 2015, up from 78% in 2012. Nigeria imports around 36% of its total consumption.

Global palm oil production distribution

Global palm oil consumption by country (million te)

Source: USDA, FBNQuest Research Source: USDA, FBNQuest Research

Production trends show that Indonesia and Malaysia are still far ahead of other countries, accounting for about 85% of global production and over 50% of global exports combined. Indonesia has grown faster, accounting for 54% of total production

Oil palm37%

Soybean28%

Rapeseed16%

Sunflower9%

Others10%

0

20

40

60

80

1964 1974 1984 1994 2004 2014

Soybean Oil Rapeseed OilPalm Oil Palm Kernel OilSunflowerseed Oil

13%

12%

0%

43%

10%

22%

54%

31%

3%

2%2%

8%

Indonesia Malaysia ThailandNigeria Congo Kinshasha Other

2015

1964

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Indo

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4 October 2016 15

in 2015/16 compared with Malaysia’s 31%. Both countries have invested heavily in their domestic palm oil industries. Over the years, Malaysia and Indonesia have seen steady growth in palm oil production. However, in recent times, output for both countries has declined due to unfavourable weather (El Nino). Consequently, exports fell by -21% on average over the last two seasons in Malaysia and by -29% last season in Indonesia. The USDA forecasts a recovery next year on the back of expected favourable weather patterns.

Indonesia and Malaysia production (million te)

Source: USDA, FBNQuest Research

Pricing Historically, the price of palm oil in Nigeria tracked global prices. Global CPO prices declined by -16.3% y/y in 2014 on slow demand from major importers (China and India). The two countries account for about 36% of global palm oil imports. In 2015, prices averaged US$560 per tonne, representing a -24% y/y decline. However, the correlation between local and global CPO prices has weakened recently due to the deteriorating macroeconomic environment in Nigeria. Even though CPO prices declined by around -24% y/y in 2015, which should bode well for importers, the decline in naira terms was much smaller owing to the devaluation of the naira. As such, any benefits palm oil importers would have had from lower US$ prices were offset by fx pressures.

CPO prices (US$/te): Domestic vs International

Source: CBN 2014 Annual Report, Bloomberg, Index Mundi, FBNQuest Research

0

5

10

15

20

25

30

35

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Indonesia Malaysia

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Nigeria Global


4 October 2016 16

Aside the naira depreciation, a major reason domestically produced CPO is more expensive than imported CPO is high energy costs. Nigeria’s huge infrastructure deficit ultimately leads to a higher cost of production. Typically, manufacturing companies in Nigeria have to generate their own power for the most part. As such, there has been huge investment in machinery that will help them manage energy costs and increase operational efficiency. Price increases this year has been in the low double digit range.

Industry structure and dynamics in Nigeria

The Nigerian palm oil industry is very fragmented and dominated by smallholder farmers. Combined, they account for over 90% of the crude palm oil production locally. However, palm oil consumption in Nigeria outstrips domestic supply. Local production is estimated at 970,000te versus demand of approximately 1.5 million te. The largest commercial producers in Nigeria, Okomu Oil and Presco, account for just 7% of total production. PZ Wilmar is joining the ranks although its plantations are just beginning to bear fruits. Other domestic producers include Dansa Agro Plantations Limited (a part of the Dangote Group), Real Plantation, A and Hatman, IMC Limited, JB Farms Limited, Saturn Farms and Aden River. Nigeria was the largest producer of palm oil globally in the ‘60s, exporting an average of 150,000te per year but now imports about 500,000te annually. The misfortunes of the Nigerian palm oil industry can be traced to factors such as the negative effects of the Nigerian civil war which took place between 1967 and 1970, a lack of investment in palm oil extraction technology and a lack of technical competence and training.

Nigeria’s CPO production and import trends (million te)

Source: USDA, FBNQuest Research

A study by the Department of Agricultural Extension and Rural Development in 2011 showed that a regular problem that farmers encounter was that of adulterated seedlings which ultimately reduces yield. Seedlings transplanted when they are over 10 months old tend to have higher yields and bear fruits earlier. Adulterated seedlings are sold on to farmers without having been in the nursery for at least 10 months. All these factors have led to reduced supply locally and high cost of palm products and palm oil.

0200400600800

1,0001,2001,4001,6001,800

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Production Imports


4 October 2016 17

Outlook – H2 2016 and beyond

Strategy and expansion plans of key players Okomu Oil commenced production in Nigeria in 1979. It is located in Benin, Edo state. The company has undergone some strategic changes; from solely producing fresh fruit bunches to crude palm oil production. In addition, Okomu fully kicked off rubber production in 2008. With a total plantation area of over 18,000ha for palm oil and rubber plantation, it had an output of around 43,000te and 7,600te respectively in 2015 and produced 42,868te of CPO, 35% higher than its 2014 output. Last year, Okomu cleared about 4,000 hectares (ha) of land for palm oil cultivation. Another 4,000ha is expected to be prepared this year. The company has also given the indication that it expects to cultivate additional 12,000ha of palm trees within 3 years. In 2011, its rubber business accounted for 40% of revenue. However, due to unfavorable pricing, sales have declined and thus rubber’s contribution to the company’s topline fell to as low as 20% in 2015. In the near term, we do expect a significant recovery in rubber prices. Okomu management has also hinted that rubber volumes are likely to be subdued this year. As such, we expect that the company to focus more on growing its palm oil volumes. Presco is a subsidiary of Siat s.a., a Belgian agro-industrial company. The company has 3 estates – Obaretin (7,000ha) and Ologbo (11,000ha) both in Edo state, and Cowan (2,800ha) in Delta state. The 3 estates achieved production of fresh fruit bunches (FFB) in excess of 176,000 tonnes in 2015, 14,000 more than the previous year. The company recently started operations in Sakponba with the development of a nursery. Presco’s fully integrated industrial facilities consist of a palm oil mill with a capacity of 60 tonnes FFB per hour, a palm kernel crushing plant with a capacity of 60 tonnes per day and a refinery fractionation plant with a capacity of 100 tonnes per day. Presco’s CPO production increased by 10% to 39,328te in 2015. Aside aggressive plantation growth, the company continues to invest in machinery, most of which are automated. In 2015, it successfully installed a new tilting steriliser unit which helps to reduce both sterilising time and the use of steam. Another strategy Presco has undertaken is to reduce its cost of production. The company installed a biogas plant in 2014. Management disclosed that the company saves US$200,000 monthly since the project was completed. Gross margin averaged 61.0% between 2013 and 2015 compared with an average of 45.5% between 2010 and 2012. The thermopac, one of the machines used in the palm oil refinery process, previously utilised about 500-600 litres of kerosene daily but now runs 100% with biogas. The company is also investing in research and development. It has over 600ha and 300 people dedicated to field research and trials. The trials relate to the agronomic aspects of oil palm such as fertilisation, soil and land preparation, planting density and the use of organic mill waste to maintain or enhance soil fertility and production. Research work is also underway for cloning of high yielding trees. In addition, the


4 October 2016 18

company is looking to acquire plantations that are badly managed in other states. These plantations will be either bought out or leased. While Presco’s palm oil expansion plans remain aggressive, the company still has an eye on rubber although planting has not yet commenced. PZ Wilmar was formed in 2011 as a partnership between PZ Cussons and Wilmar International. It plans to set up a fully integrated project at an estimated cost of US$650m to grow palm oil trees, mill and then transport the crude palm oil to its refinery. The JV has acquired 26,500ha of land for oil palm plantation in several estates in Cross River state, and another 12,800ha from Obasanjo Farms. The firm targets a total area of around 50,000ha. It has invested US$165m in building a 1,000 tonne capacity refinery in Lagos from which it refines, fractionates and packages crude palm oil into Mamador and Devon King’s vegetable oil brands for PZ Cussons Nigeria’s food and nutrition business. While the project is laudable, it will take between 3-5 years for any meaningful impact to be seen on earnings.

Positive expectations for sales and earnings Although smuggling of CPO from neighbouring countries persists and the supply deficit in Nigeria is still significant, local palm oil companies have been able to boost their revenue and earnings by aggressively expanding their plantations and increasing volumes. The twin impact of the naira devaluation and the CBN’s restriction on availability of foreign exchange for importation of CPO has helped the palm oil companies to grow their topline and earnings in recent quarters. We expect these factors to continue to play a major role in near to medium term outlook of the palm oil companies. As such, we expect Okomu and Presco to grow their sales by 24.5% y/y and 38.8% y/y to N12.1bn and N14.5bn respectively in 2016E. Also, we expect their PBT to grow by 62.7% y/y and 43.7% y/y to N4.7bn and N6.1bn respectively. Beyond 2016, we forecast sales growth of 11.2% y/y and 13.9% y/y for Okomu and Presco, and PBT growth of 3.5% y/y and 6.2% y/y on average over 2017-19E period.

Okomu Oil quarterly sales growth and PBT margin trend (N m)

Presco quarterly sales growth and PBT margin trend (N m)

Source: Company data, FBNQuest Research Source: Company data, FBNQuest Research

-20%

0%

20%

40%

60%

80%

0

1000

2000

3000

4000

5000

Q1

2015

Q2

2015

Q3

2015

Q4 2

015

Q1

2016

Q2

2016

Sales Sales growth PBT Margin

-40%-20%0%20%40%60%80%100%

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4 October 2016 19

Okomu Oil Financials (Dec YE): N millions, except per share data

Source: Company data, FBNQuest Research estimates

Year to and as at December 31st N million (except where stated)INCOME STATEMENT 2015A 2016E 2017E 2018E CASHFLOW STATEMENT 2015A 2016E 2017E 2018ETurnover 9,738 12,121 13,347 14,835 PAT 2,897 4,149 4,227 4,338Gross profit 6,313 9,697 10,137 10,648 Non cash items 1,248 1,231 1,081 1,104Total opex -3,141 -4,606 -4,939 -5,192 Operating profit after adjusting for n 4,144 6,323 6,281 6,562Other Income 113 1 1 1 Cash flow from operations 3,999 6,305 5,904 6,369Exceptional item - - - - Purchase of fixed assets -928 -1,211 -1,293 -1,335EBIT 3,285 5,092 5,200 5,457 Acquisition of biological assets 0 0 0 0EBITDA 4,539 6,323 6,281 6,562 Proceeds from sale of F.A. 14.75 - - - Interest received 43 50 100 50 Cash flow from invstmt -3,123 -3,986 -4,211 -4,401Interest paid -429 -427 -496 -521 Interest paid 0 -427 -496 -521PBT 2,899 4,715 4,804 4,986 Long term loan received - 339 356 247 Taxation -267 -566 -576 -648 Prior year dividend paid -238 -95 -207 -211PAT 2,698 4,149 4,227 4,338 Cash flow from financing 1,611 -183 -347 -486

Net incr. (decr.) in cash 2,487 2,135 1,345 1,482BALANCE SHEET 2015A 2016E 2017E 2018E Cash at start -1,528 958 3,094 4,439Fixed assets 9,849 9,828 10,041 10,271 Closing cash balance 959 3,094 4,439 5,921Biological assets 7,396 10,221 13,239 16,355Non current assets 17,245 20,050 23,280 26,626Stocks 1,491 1,734 1,851 1,988 PROFITABILITY RATIOS 2015A 2016E 2017E 2018ETrade debtors 63 71 74 78 Gross margin 64.8% 80.0% 76.0% 71.8%Other debtors 297 333 350 369 EBITDA margin 46.6% 52.2% 47.1% 44.2%Cash & bank balances 958 3,094 4,439 5,921 EBIT margin 33.7% 42.0% 39.0% 36.8%Current assets 2,809 5,231 6,713 8,357 PBT margin 29.8% 38.9% 36.0% 33.6%Total assets 20,053 25,281 29,993 34,983 Net profit margin 27.7% 34.2% 31.7% 29.2%Deferred tax liability 1,733 2,385 2,138 2,284 ROCE av. 38.7% 55.2% 57.3% 62.0%Provision for gratuity 353 360 360 360 ROCE / WACC 2.5x 3.5x 3.6x 3.8xFinancial liabilities 3,386 3,725 3,911 4,107 Opex/sales -32.3% -38.0% -37.0% -35.0%Non current liabilities 5,472 6,469 6,409 6,750Creditors & accruals 1,019 1,159 1,453 1,655 ACTIVITY RATIOS 2015A 2016E 2017E 2018ETaxation 612 648 792 935 Inventory turnover 2.4x 1.5x 1.8x 2.2xOther current financial 340 340 511 562 Days of inventory on hand 155 243 204 167Other current liabilities 547 547 691 817 Receivables turnover 17.8x 31.8x 32.3x 34.1xCurrent liabilities 2,517 2,694 3,447 3,969 Days of sales outstanding 20 11 11 11Share capital 477 477 477 477 Payables turnover 6.6x 4.2x 4.5x 4.7xShare premium account 1,867 1,867 1,867 1,867 No. of payable days 55 86 81 78Reserves for bonus issue - - - - Cash conversion cycle 120 168 135 100Revenue reserve 9,720 13,773 17,793 21,920 Working capital turnover -6.3x -19.8x -15.4x -11.0xShareholders' funds 12,064 16,118 20,137 24,264 Fixed asset turnover 1.0x 1.2x 1.3x 1.5xTotal liab. & SH funds 20,053 25,281 29,993 34,983 Capital employed turnover 1.1x 1.3x 1.5x 1.7x

Total asset turnover 0.4x 0.5x 0.5x 0.5x

Per share data 2015A 2016E 2017E 2018E LIQUIDITY & SOLVENCY 2015A 2016E 2017E 2018EAve. shares ranking (m) 954 954 954 954 Current ratio 1.1x 1.9x 1.9x 2.1xEPS (reported) (N) 2.83 4.35 4.43 4.55 Quick ratio 0.5x 1.3x 1.4x 1.6xEPS (adjusted) (N) 2.86 4.35 4.43 4.55 Cash ratio 0.4x 1.1x 1.3x 1.5xCFPS 0.2 0.2 0.2 0.1 Debt-to-assets ratio 19% 16% 15% 13%FCF per share (N) 1.1 0.4 0.6 0.5 Debt-to-capital ratio 24% 20% 18% 16%DPS (N) 0.1 0.2 0.2 0.2 Debt-to-equity ratio 31% 25% 22% 19%Payout ratio (%) 5% 5% 5% 5% Financial leverage 1.7x 1.6x 1.5x 1.4xNAVPS (N) 12.6 16.9 21.1 25.4

Y/y growth 2015A 2016E 2017E 2018EVALUATION 2015A 2016E 2017E 2018E Turnover 12.5% 24.5% 10.1% 11.1%Price to earnings (P/E) 12.2x 8.0x 7.9x 7.7x Gross profit 32.5% 53.6% 4.5% 5.0%Dividend yield 0.3% 0.6% 0.6% 0.6% Total opex 21.7% 46.6% 7.2% 5.1%Price to free cash flow 10.8x 6.7x 7.5x 7.0x Operating profit (EBIT) 50.4% 55.0% 2.1% 4.9%EV / sales 3.7x 2.9x 2.5x 2.2x PBT 36.2% 62.7% 1.9% 3.8%EV / EBITDA 8.0x 5.5x 5.4x 5.0x PAT 71.8% 53.8% 1.9% 2.6%EV / EBIT 11.1x 6.8x 6.5x 6.0x EPS (adjusted) (N) 57.5% 52.2% 1.9% 2.6%EV / CE 4.0x 3.7x 3.8x 3.7x DPS (N) -60.0% 117.5% 1.9% 2.6%Free cash flow yield 9.2% 15.0% 13.4% 14.3%Price to book value 2.8x 2.1x 1.7x 1.4x


4 October 2016 20

Presco Financials (Dec YE): N millions, except per share data

Source: Company data, FBNQuest Research estimates

Year to and as at December 31st N million (except where stated)INCOME STATEMENT 2015A 2016E 2017E 2018E CASHFLOW STATEMENT 2015A 2016E 2017E 2018ETurnover 10,448 14,500 16,209 18,318 Profit pre WC. chngs. 4,756 8,425 6,531 7,270Gross profit 6,635 9,570 10,698 12,090 Working capital changes -3,298 (631) (120) (148) Total opex -3,140 -4,350 -5,268 -6,136 Cash flow from operations 1,458 7,794 6,411 7,121Gain/loss on bio. asset. reval. 1,062 658 - - Purchase of fixed assets -2,984 -4,031 -4,538 -4,579Exceptional item - - - - Acquisition of intangibles - - - - Other Income 365 912 912 912 Acquisition of biological assets - - - - EBIT 4,923 6,790 6,341 6,865 Proceeds from sale of F.A. - - - - Interest received - - - - Cash flow from investment -2,921 -4,031 -4,538 -4,579Interest paid -708 -731 -708 -708 Net cash flow after investment -1,463 3,763 1,873 2,542PBT 4,215 6,058 5,633 6,156 Interest paid 0 -731 -708 -708Taxation -1,894 -1,818 -1,690 -1,847 Long term loan received -1,921 - - - PAT 2,337 4,241 3,943 4,310 Prior year dividend paid -1,000 -1,000 -1,559 -1,342

Cash flow from financing 908 -1,731 -2,268 -2,051BALANCE SHEET 2015A 2016E 2017E 2018E Cash at start -290 -845 1,187 792Fixed assets 12,962 15,956 19,218 22,260 Net incr. (decr.) in cash -556 2,032 -395 491Intangible assets 184 184 184 184 Closing cash balance -845 1,187 792 1,283Biological assets 36,319 36,319 36,319 36,319Non current assets 49,465 52,459 55,721 58,763 PROFITABILITY RATIOS 2015A 2016E 2017E 2018EStocks 1,106 1,534 1,715 1,938 Gross margin 63.5% 66.0% 66.0% 66.0%Trade debtors 2,986 4,143 4,632 5,234 EBITDA margin 55.8% 54.0% 47.0% 45.9%Other debtors - - - - EBIT margin 47.1% 46.8% 39.1% 37.5%Cash & bank balances 669 2,974 1,591 1,735 PBT margin 40.3% 41.8% 34.8% 33.6%Current assets 6,013 9,904 9,190 10,160 Net profit margin 22.4% 29.2% 24.3% 23.5%Total assets 55,478 62,362 64,911 68,923 ROCE av. 43.5% 50.4% 36.7% 32.4%Deferred tax liability 16,050 16,714 17,580 2,453 ROCE / WACC 2.5x 2.9x 2.1x 1.8xProvision for gratuity 271 271 271 271 Opex/sales 30.0% 30.0% 32.5% 33.5%Financial liabilities 4,042 4,042 4,042 4,042Provisons - - - - ACTIVITY RATIOS 2015A 2016E 2017E 2018ENon current liabilities 18,656 20,885 21,549 22,189 Inventory turnover 3.1x 3.7x 3.4x 3.4xCreditors & accruals 3,357 4,658 5,207 5,885 Days of inventory on hand 118.2x 97.7x 107.6x 107.1xTaxation 905 869 808 883 Receivables turnover 4.4x 4.1x 3.7x 3.7xFinancial liabilities 528 528 528 528 Days of sales outstanding 83.0x 89.7x 98.8x 98.3xOther current liabilities - - - - Payables turnover 1.6x 2.0x 1.7x 1.7xCurrent liabilities 6,426 7,841 7,341 7,747 No. of payable days 231.2x 182.0x 210.9x 209.2xShare capital 500 500 500 500 Cash conversion cycle -29.9x 5.5x -4.5x -3.8xShare premium 1,174 1,174 1,174 1,174 Working capital turnover -16.3x -14.5x -49.6x 39.1xRevenue reserve 28,722 31,963 34,347 37,314 Fixed asset turnover 0.9x 1.0x 0.9x 0.9xShareholders' funds 30,395 33,636 36,020 38,987 Capital employed turnover 0.9x 1.1x 0.9x 0.9xTotal liab. & SH funds 55,478 62,362 64,911 68,923 Total asset turnover 0.2x 0.2x 0.3x 0.3x

Per share data 2015A 2016E 2017E 2018E LIQUIDITY & SOLVENCY 2015A 2016E 2017E 2018EAve. shares ranking (m) 1,000 1,000 1,000 1,000 Current ratio 0.9x 1.3x 1.3x 1.3xEPS (reported) (N) 2.34 4.24 3.94 4.31 Quick ratio 0.8x 1.1x 1.0x 1.1xEPS (adjusted) (N) 1.75 3.78 3.94 4.31 Cash ratio 0.1x 0.4x 0.2x 0.2xCFPS 0.7 0.1 0.2 0.1 Debt-to-capital ratio 17.9% 17.0% 14.1% 12.4%FCF per share (N) -0.7 0.3 0.5 0.4 Debt-to-equity ratio 21.7% 20.4% 16.4% 14.2%Net dividend (N) 1.0 1.6 1.3 1.4 Financial leverage 1.8x 1.9x 1.8x 1.8xPayout ratio (%) 43% 37% 34% 31%NAVPS (N) 30.4 33.6 36.0 39.0

Y/y growth 2015A 2016E 2017E 2018EVALUATION 2015A 2016E 2017E 2018E Turnover 14.3% 38.8% 11.8% 13.0%Price to earnings 18.8x 10.6x 10.1x 0.0x Gross profit 11.7% 44.2% 11.8% 13.0%Dividend yield 3.0% 3.9% 3.4% 0.0% Total opex -9.5% 38.6% 21.1% 16.5%Price to free cash flow -21.6x 10.6x 21.4x 0.0x Operating profit (EBIT) -40.4% 37.9% -6.6% 8.3%EV / sales 2.7x 2.3x 2.1x 0.0x PBT -46.7% 43.7% -7.0% 9.3%EV / EBITDA 4.9x 4.2x 4.5x 0.0x PAT -55.0% 81.5% -7.0% 9.3%EV / EBIT 5.8x 4.9x 5.5x 0.0x EPS (reported) (%) -55.0% 81.5% -7.0% 9.3%EV / CE 2.4x 2.2x 1.8x 0.0x EPS (adjusted) (%) 25.0% 115.8% 4.3% 9.3%Free cash flow yield -4.6% 9.4% 4.7% 0.0% DPS (N) 0.0% 55.9% -13.9% 0.7%Price to book value 1.1x 1.2x 1.1x 0.0x


4 October 2016 21

Valuation methodology Okomu Oil: Our N38.4 price target for Okomu Oil is derived using a DCF model over the 2017-2027 period. Our model assumes a long-term sales growth of 7% and a terminal EBIT margin of 29%. We assume both will be reached largely in a linear trajectory from our 2019 estimates by 2027. Our DCF model makes use of a WACC of 15.9%. Our WACC is driven by a beta of 0.5 and a risk free rate of 14.5%. Other components driving our WACC include an equity risk premium of 6.5% and an after-tax cost of debt of 6.6%. Presco: Our N44.0 price target for Presco is derived using a DCF model over the 2017-2027 period. Our model assumes a long-term sales growth of 8% and a terminal EBIT margin of 25%. We assume both will be reached largely in a linear trajectory from our 2018 estimates by 2027. Our DCF model makes use of a WACC of 17.66%. Our WACC is driven by a beta of 0.7 and a risk free rate of 14.5%. Other components driving our WACC include an equity risk premium of 6.5% and an after-tax cost of debt of 9.2%. Research analyst certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. Recommendations and movements in price target Okomu Oil

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 26-Feb-2014 38.6 n/a 46.5 n/a Outperform

14-Apr-2014 42.0 46.5 44.4 Outperform Neutral

16-May-2014 34.1 44.4 34.9 Neutral Neutral

07-Aug-2014 34.4 34.9 39.4 Neutral Neutral

21-Nov-2014 26.8 39.4 39.4 Neutral Neutral

23-Jan-2015 23.9 39.4 24.7 Neutral Neutral

16-Sept-2015 27.1 24.7 25.7 Neutral Neutral

04-Nov-2015 30.2 25.7 27.6 Neutral Neutral

24-Jan-16 30.0 27.6 30.2 Neutral Neutral

14-Apr-16 30.0 30.2 32.4 Neutral Neutral

05-May-16 29.1 32.4 38.4 Neutral Neutral


Presco

Date Price(N) Old Price Target (N) New Price Target (N) Old recommendation New recommendation 26-Feb-14 40.0 n/a 50.5 n/a Outperform 14-Aug-14 37.0 50.5 40.8 Outperform Neutral 06-Nov-14 27.5 40.8 42.4 Neutral Neutral 23-Jan-15 29.7 42.4 31.4 Neutral Neutral

26-May-15 30.0 31.4 25.0 Neutral Neutral 20-Aug-15 32.0 25.0 30.0 Neutral Neutral 13-Nov-15 30.5 30.0 28.3 Neutral Neutral 25-Jan-16 33.0 28.3 27.9 Neutral Neutral 04-Jul-16 37.0 27.9 35.5 Neutral Neutral


FBNQuest Research’s recommendation distribution

Outperform Neutral Underperform Total Stocks covered 7 11 11 29

% of total stocks covered 24.1% 37.9% 37.9% 100%

Investment banking clients 4 4 2 10

% of investment banking clients 40.0% 40.0% 20.0% 100.0%


4 October 2016 22

FBNQuest Equity Research recommendation definitions

Outperform The analyst expects the stock to outperform the Nigerian Stock Exchange (NSE) All Share Index over the next 12 months or the specified investment horizon.

Neutral The analyst expects the stock to perform in line with the NSE All Share Index over the next 12 months or the specified investment horizon.

Underperform The analyst expects the stock to underperform the NSE All Share Index over the next 12 months or the specified investment horizon.

Not Rated The rating and price target are currently suspended to comply with regulations or firm policies such as when FBN Capital is acting as an adviser in a merger or transaction which involves the company whose rating has been suspended or due to reasons that limit the ability of the analysts to provide forecasts for the company in question.

Benchmark The Nigerian Stock Exchange All Share Index

Price targets Price targets reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings fall short of estimates.

Asset allocation The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable. Companies from which FBN Capital has received compensation in the last 12 months

Outperform Neutral Underperform Total

4 4 2 10

% distribution 40.0% 40.0% 20.0% 100%

Important US Regulatory Disclosures on Subject Companies This material was produced by FBN Capital Limited solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by LXM LLP USA and elsewhere in the world by FBN Capital Limited or an authorized affiliate of FBN Capital Limited. This document does not constitute an offer of, or an invitation by or on behalf of FBN Capital Limited or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which FBN Capital Limited or its Affiliates consider to be reliable. None of FBN Capital Limited or its affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. LXM LLP USA assumes responsibility for the research reports content in regards to research distributed in the U.S. LXM LLP USA or its affiliates has not managed or co-managed a public offering of securities for the subject company in the past 12 months, has not received compensation for investment banking services from the subject company in the past 12 months, does not expect to receive and does not intend to seek compensation for investment banking services from the subject company in the next 3 months. LXM LLP USA has never owned any class of equity securities of the subject company. There are not any other actual, material conflicts of interest of LXM LLP USA at the time of the publication of this research report. As of the publication of this report LXM LLP USA, does not make a market in the subject securities. Please bear in mind that FBN Capital is the employer of the research analyst(s) responsible for the content of this report and (ii) research analysts preparing this report are resident outside the United States and are not associated persons of any US regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a US broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with US rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.


4 October 2016 23

Subject company Price (N) Rating Applicable disclosures

A and Hatman n/a n/a n/a

Aden River n/a n/a n/a

Arla Foods n/a n/a n/a

Dangote Group n/a n/a n/a

Dangote Industries Limited n/a n/a n/a

Dansa Agro Plantations Limited n/a n/a n/a

Felda Global Ventures MYR2.42 n/a n/a

First Resources Limited SGD1.85 n/a n/a

IJM Plantations BHD MYR3.56 n/a n/a

IMC Limited n/a n/a n/a

JB Farms Limited n/a n/a n/a

Kuala Lumpur Kepong BHD MYR24.04 n/a n/a

Olam SGD2.06 n/a n/a

Okomu Oil 38.00 N n/a

PP London Sumatra Indones PT IDR1,525.00 n/a n/a

Presco 40.00 N n/a

PZ Cussons GBp363.60 n/a n/a

PZ Cussons Nigeria 20.70 UP n/a

PZ Wilmar n/a n/a n/a

Real Plantation n/a n/a n/a

Sampoerna Agro TBK PT IDR1,950.00 n/a n/a

Sarawak Oil Palm Berhad MYR3.76 n/a n/a

Saturn Farms n/a n/a n/a

United Malacca BHD MYR5.69 n/a n/a

Vicampro Farms Limited n/a n/a n/a

Wilmar International Limited SGD3.22 n/a n/a I. The analyst(s) responsible for the preparation and content of this report (as shown on the front page of this report) holds personal positions in a

class of common equity securities of the company to which this report relates.

II. FBN Capital Limited or its Affiliates have recently been the beneficial owners of 1% or more of the securities mentioned in this report.

III. FBN Capital Limited or its affiliates have managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.

IV. FBN Capital Limited or its affiliates have received compensation for investment banking services from the issuer of these securities in the past 12 months.

V. FBN Capital Limited expects to receive compensation for investment banking services from the issuer of these securities within the next three months.

VI. FBN Capital or FBN Holdings is a market maker in the subject securities.

VII. The company is a client of FBN Capital.


4 October 2016 24

Important Risk Warnings and Disclaimers This report was prepared, approved, published and distributed by FBN Capital Limited (“FBN Capital”), operating under the brand name FBNQuest, a company located outside of the United States (a “non-US Group Company”). FBNQuest is the brand name of the Investment Banking and Asset Management businesses of FBN Holdings Plc, which comprises FBN Capital Limited, FBN Securities Limited, FBN Capital Asset Management Limited, FBN Trustees Limited, FBN Funds Limited and FBN Capital Partners Limited. FBN Capital Limited is regulated by the Securities and Exchange Commission in Nigeria (SEC). This report is distributed in the U.S. by LXM LLP USA, a U.S. registered broker dealer, on behalf of on behalf of FBN Securities Limited, a wholly owned subsidiary of FBN Capital Limited only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through LXM LLP USA. Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organisation. The information has been compiled or arrived from sources believed to be reliable and in good faith, but no representation or warranty, express or implied is made as to their accuracy, completeness or correctness. FBN Capital Limited has not verified the factual accuracy, assumptions, calculations or completeness of the information. Accordingly, FBN Capital Limited accepts no liability whatsoever for any direct or consequential loss or damage arising from (i) the use of this communication (ii) reliance of any information contained herein, (iii) any error, omission or inaccuracy in any such Information or (iv) any action resulting there from. FBN Capital Limited provides the information for the purpose of the intended recipient’s analysis and review. Accordingly you are advised to verify the factual accuracy, assumptions, calculations or completeness of the information. FBN Capital is a subsidiary of FBN Holdings Plc. FBN Capital or any other subsidiary of FBN Holdings may make market or deal in the shares mentioned in this report. One or more persons of FBN Capital Limited or its affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon either for their own account or on behalf of their clients. FBN Capital or other subsidiaries of FBN Holdings may also take proprietary trading positions in the shares of companies discussed in this publication, and may receive remuneration for the publication of its research and for other services. FBN Capital Limited or its affiliates may, to the extent permitted by law, act upon, or use the above material or the conclusions stated above or the research or analysis on which they are based before the material is published to recipients and from time to time provide investment banking, investment management or other services for, or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report. Accordingly, this document may not be considered as free from bias. Additional information may be available to FBN Capital or FBN Holdings which is not discussed in this report. Further disclosure regarding FBN Capital’s policy regarding potential conflicts of interest in the context of investment research and FBN Capital’s policy on disclosure and conflicts in general are available on request. © FBNQuest 2016. All rights reserved. A part of the FBN Holdings Group 16 Keffi Street, Off Awolowo Road S.W. Ikoyi Lagos Nigeria

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