VSA CAPITAL MARKET MOVERS - Morning Agri Comment, 09/04/19


VSA Morning Agri Comment, 09/04/19

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DekelOil# - Q1 Production & Sales Update

Côte d'Ivoire agricultural company DekelOil Public Limited (LON:DKL) has announced a production update for Q1 2019.

  • Fresh Fruit Bunches (FFB) Collected: 69,340t*, +16.5% YoY (Q1 2018: 59,531t)
  • Crude Palm Oil (CPO) Production: 14,921t, +9.7% YoY (Q1 2018: 13,605t)
  • CPO Extraction Rate: 21.8% (Q1 2018: 22.7%)
  • CPO Sales: 12,009t, -12.7% YoY (Q1 2018: 13,758t)
  • Average CPO Selling Price: €520/t, -5.1% YoY (Q1 2018: €548/t)

*1,050t of this total was not processed during quarter.

VSA Comment

Following last year’s disappointing harvest levels, we were hopeful of increased FFB volumes in H1. DKL has now confirmed this is indeed the case for Q1 at least, which was the second highest ever Q1 in terms of FFB collected (c.4% below FY 2017). DKL reports that its market share remained stable during the period, supporting the forecasted climate-based recovery in production levels across the region, as opposed to any market share gain. 

Encouragingly, commentary from management suggests this trend will continue into Q2. Having produced 8,637t of CPO in Q2 2018, we are hopeful of a significantly improved result this year and look forward to confirmation of this when the company releases its FY 2018 results in June.

DKL recorded a lower extraction rate than normal in the quarter due to lower levels of oil content in the FFB delivered to its mill, a trend which management believes was also seen by local competitors.    

Based on our quarterly tracking data, we believe DKL carried over c.3,600t of CPO into Q2 (c.€2m of revenues at the average Q1 selling price). Indeed, DKL confirms in this morning’s update that sales of 2,240t, for which cash was received during the quarter before customer collection had occurred, were recognised shortly after the period end. Including these sales in the Q1 figures would have delivered a c.1% increase in CPO sales compared with a similarly adjusted Q1 2018 figure, as opposed to the c.13% decrease reported.

It is also positive to note that DKL reports that the price paid to smallholders for FFB is normalising. This was a significant issue last year, as competition from mills was high, as a result of the lower harvest. With more normal trading conditions, this suggests the company’s gross margin is back at the mid-to-high 20s, which the company recorded in each of FY 2015, FY 2016 and FY 2017.

With FFB collection and CPO production accounting for c.40% of FY production historically, DKL appears to be trading c.3% off our FY 2019 FFB harvest forecast (177,441t) and c.9% off our FY 2019 CPO production forecast (40,102t) at this point. However, we are hopeful that a more normalised extraction rate and a stronger Q2 can move this run-rate back towards our forecasts. 

Impressively, for the ninth quarter in a row DKL has achieved an average selling price in-line with, or at a premium to the European benchmark CPO price. We remain bullish on CPO pricing for 2019 given that efforts to increase biodiesel consumption in South East Asia are now finally starting to have an impact on domestic consumption levels (and can now be seen in the data). In Indonesia, implementation of B30 (30% palm-based biodiesel blended with traditional diesel) has now been brought forward to start towards the end of this year.

Successful implementation of B30 could add an extra 3-4 million tonnes to the country’s domestic consumption levels, offsetting a large proportion of the total palm oil consumed in the EU for biofuel. Even if the EU does phase out palm oil as a feedstock for biodiesel by 2030, alternative sources of edible oil will need to be found to replace this, leaving a gap elsewhere, which the lowest cost edible oil, palm oil, would logically replace.

In addition, we believe that due to the massively underreported african swine fever outbreak in China, demand for soymeal will reduce and thus reduce the amount of soybean oil ‘by-product’ that is produced from the crushing of soybeans for animal feed. This should also be bullish for the edible oil pricing complex in the near-to-medium term and perhaps encourage additional Chinese purchases of palm oil as a result.

We maintain our BUY recommendation and target price of 12p.

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