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DekelOil’s success belies weak palm oil market

DekelOil maintains good margins despite current low-end palm oil prices

The AIM firm's palm oil is sold at a premium to international benchmarks

Successful ramping up of palm oil production in Ivory Coast has seen DekelOil’s (LON:DKL) shares advance around 25% for the year-to-date.

It is an achievement that belies the weak economics within the broader palm oil sector.

Some investors may, nevertheless, question whether they ought to see more returns from a company that by the mid-way point has already eclipsed last year’s output.

Others, however, may wonder whether there's an opportunity to buy cheaply into a potentially significant player in a sector known for premium takeovers.

DekelOil shares have yet to return to the highs of around 1.9p, seen in early 2014, when production began and off-take arrangements were signed, yet a casual observer would see little or no clues that crude palm oil prices at their lowest for almost eight years.

Prevailing international prices are only slightly above US$600 per tonne of the versatile commodity, used in food processing and consumer goods, following a notably sharp decline of around 30% in the past twelve months.

Longer term forecasts are more positive, but presently the international market is affected by a build-up of inventories in Indonesia and Malaysia (which account for three quarters of global supply), as well as slack demand and increased use of alternative crops such as soy.

Whilst low prices have dampened sentiment towards the sector it is probably fair to say Dekel has weathered a tough operating environment, and has weathered it rather well.

Favourable margins and rapidly expanding production has been key.

Tuesday’s trading update reveals an average sales price of US$619 per tonne, which was above the international benchmark in the same period.

DekelOil’s Ayenouan mill in the Ivory Coast produced 21,836 tonnes of crude palm oil (CPO) in the six month period, which includes the peak harvest between March and June. That represents a 53% increase on the 14,242 tonnes that were produced in the whole of 2014.

“We continue to sell at a premium [to the international palm oil price] and we continue to have a good gross margin even at current low-end prices,” executive director Lincoln Moore explained recently.

Production growth and margin gains set DekelOil up for a “significant step change in profitability”, Moore explained as the company gave its first half update.

The imminent addition of a new kernel crushing plant promises further upside and is central to Dekel’s strategy to maximise profitability, according to Moore.

As much as the future promises, investors ought not overlook the progress to date.

Results for 2014, released last month, show a positive year in its own right with the company reported €10mln of revenue and had earnings of €0.2mln in the twelve months to December 31 2014.

N+1 Singer, the house broker, described it as a “successful first year of revenue-generating operations”, and highlighted DekelOil narrowly exceeded expectations.

Analyst Trevor Griffiths expects profitability to be “significantly boosted” in the current year by the new kernel crushing plant, as well as increasing volumes from the company’s plantations as they start to mature.

Dekel, according to N+1’s figures, will this year generate revenues of just over 20mln (EURO), with earnings forecast at 5.1mln. Griffiths then sees another step up to 30mln and 9.6mln respectively in 2016.

The analyst sees the current valuation as ‘undemanding’ and, following Tuesday’s update, said he would update forecasts to incorporate ‘encouraging’ new details in the near future.

Takeover potential has already been talked up in some corners of the market, spurred following Sime Darby’s US$1.1bn acquisition of London listed New Britain Palm Oil.

Whilst some read-across is obvious, investors will be well aware that Dekel and NBPO are vastly different companies in terms of size and maturity.

Sime Darby’s takeover came at an 85% premium. At the time NBPO was producing around 575mln tonnes of crude palm oil annually, and was generating US$618mln of revenue and US$191mln of earnings.

Even with its successes Dekel still generates a fraction of that, and as such it is priced in the stock market with a discounted valuation in the order of £20mln.

Another key difference is in the company’s respective geographies. Palm oil is a native crop to West Africa, albeit industrial scale production is less matured presently.

As a result West Africa is considered preferable in terms of sustainability. This may prove to be a key selling point, when the time comes.

“We are one of the largest independent palm oil producers in West Africa, and I think there’s going to continue to be interest from South East Asian players looking to get a platform in West Africa,” Moore told Proactive Investors back in May.

“I think the palm oil price coming off has perhaps slowed that interest down for the moment, but, we expect that interest to come back. But, for us, we’ve got a lot to get on with.

“We’re producing well, maybe between 30-35,000 tonnes for the year. And that is still only about half our mill capability and we’ve got a new crushing plant to come online as well.

“So, before we start to worry about takeovers we’ve got a lot of natural share price movement upwards to come, and if that [takeover interest] comes in the future, at a significant premium, then of course we’ll look at it and speak with shareholders about what they want us to do.”

The start-up of the new crusher, updates on the entire peak season volumes and progress towards the next production milestones will provide investors with potential share price catalysts in the meantime.

So far, so good for Dekel in 2015. Now, investors will be hoping to see more of the success translate into shareholder value.

Quick facts: Dekeloil Public Ltd

Price: 2.75 GBX

Market: AIM
Market Cap: £11.63 m

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