Ramping up palm oil production in the Ivory Coast has started to bring substantial benefits for DekelOil (LON:DKL) including a refinancing that should positively affect profitability.
A loan for €8.69mln that was used to partly fund its Ayenouan palm oil plant has been replaced by a new €9.15mln, seven-year facility.
Dekel has been able to secure debt on far better terms after successfully building and bringing Ayenouan into production.
This provides it with a cash generative asset against which it can borrow.
In the eyes of lenders the company is a far less risky proposition, which is reflected in these lower interest rate payments.
The coupon on the debt has come down to 7% from 10.5% meaning the annual interest charge drops by €270,000.
The capital repayments are also reduced – by €600,000 this year and €800,000 next.
The firm said it is advanced discussions to refinance a €6.7mln development loan. It cancelled a €5.2mln capital note last December.
Last year the operation churned out 35,770 tonnes of crude palm oil (CPO).
CHIEF EXECUTIVE LINCOLN MOORE
On the refinancing…
“With the project significantly de-risked, we are now focused on ensuring the excellent progress made on the ground is fully reflected in our corporate structure and financing arrangements," said chief executive Lincoln Moore.
ABOUT THE COMPANY
A casual observer of DekelOil would see few or no clues that crude palm oil prices are 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.
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.
Even so, Dekel has weathered this tough operating environment well so far.
Dekel achieved €604 a tonne for its palm oil in 2015, down 7%; that said, this still represents a premium to the benchmark Rotterdam-quoted price, and with the impact of the unusually strong El Nino leading to low rainfall in south-east Asia, the traditional producing region, industry output is falling and prices are rising.
This trend is expected to continue into the new year, the company said.
Favourable margins and rapidly expanding production have been key.
“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,” Moore explained last year.
The imminent addition of a new kernel crushing plant promises further upside and is central to Dekel’s strategy to maximise profitability.
Boosting CPO production up towards the new mill's 70,000 tonnes annual capacity is another part of the plan.
LOCAL BACKING
To do that Dekel will need the backing of the local fruit growers, but a recent deal with one local supplier shows how highly the firm is regarded in the region.
A smallholder, who owns 1,000 hecatres (ha) of mature estates in the Ivory Coast, asked for half of the consideration for a six months supply deal to be paid in shares at a hefty premium to the prevailing market price.
Broker Cantor Fitzgerald said while relatively small, it was an innovative deal and points the way to sustainable relationships with the small holders that will supply the new plant.
TAKEOVER POTENTIAL
Takeover talk is never far away among the palm oil sector participants.
Sime Darby’s US$1.1bn acquisition of London-listed New Britain Palm Oil last year stoked the chatter though 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 recent successes Dekel still generates a fraction of that.
Another key difference is in the company’s respective geographies. Palm oil is a native crop to West Africa. As a result West Africa is considered preferable in terms of sustainability, which 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 said last year.
“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.
THE SHARE PRICE
Shares rose 4% on the refinancing to 1.22p, valuing the company at just shy of £19mln.