Inherent Value Hidden by a Down Year
In five years DekelOil Public Limited (LON:DKL) has established itself as the fourth largest palm oil producer in Côte d'Ivoire through the successful development of a 60t/hr mill and smallholder project near Ayenouan in the South East of the country (expandable to 75t/hr in the high season). Building on the success of this first project, DKL has recently commenced work on a second palm oil project in Côte d'Ivoire and has also secured an option to acquire 58.5% of a cashew processing project in the country, both of which could eventually become more profitable than Ayenouan.
High Quality Mill Operation
DKL’s mill has achieved an average CPO extraction rate of c23% since starting operations in 2014. This is testament to the operational skill at the mill site and compares very well to other African mills and even those in the mature South East Asian palm oil sector. It is particularly impressive given that DKL almost exclusively processes smallholder fruit and is therefore unable to control the quality of fruit it receives, as opposed to peers that often have surrounding company-owned estates supplying their mills.
Current Share Price Provides Attractive Entry
DKL produced almost 40,000t of crude palm oil in 2017, generating sales of €30.2m, +13.5% YoY. Its reported EBITDA increased 10% YoY to €4.5m with its PAT increasing to €1.6m, +23% YoY. For the second year running, it paid £500k of its profits out as a dividend (dividend yield: c3.3%). Although ongoing climate-related issues and low CPO prices are likely to impact operational and financial results this year, an inevitable normalisation of both of these factors could mean that the current share price proves to be an extremely attractive entry price. Our conservative forecasts suggest a PAT of c€7m is possible for 2022, with the cashew project delivering an additional attributable profit of €3m, assuming the option is exercised.
Recommendation and Target Price
Having valued DKL using a five-year discontinued cash flow, we initiate research coverage with a BUY recommendation and target price of 12p.