Dekel Agri-Vision PLC (LON:DKL) shares have rallied from lows last year and management is confident that the more diversified business and palm oil industry in general are on a much stronger footing in 2020.
Following the worst two years of pricing of crude palm oil (CPO) in 25 years, Dekel, which processes oil from an estate and local producers in Ivory Coast, West Africa, saw revenues and profits slide as sales prices fell sharply.
But over the last three months, the palm oil price has picked up to around US$765 per tonne, a more than 50% increase on the sub-US$500 lows seen during the company’s third quarter to end-September 2019.
The CPO price reached as high as US$870 in late January but, in line with many commodities, CPO has suffered from jitters surrounding the coronavirus which has seen a softening in prices to US$775 over the last few days.
Historically, selling prices for the company have averaged around US$725 per tonne.
“Getting back around and above this level makes an enormous difference,” says executive director Lincoln Moore.
“So that business should do quite well this year; we are hopeful 2020 will see our palm oil operation return back to historic levels of profitability.”
Investors who have lost touch with Dekel will notice that the former DekelOil changed its name last year, which reflects the increasing diversity to operations and future revenues.
The new businesses both make use of the company’s expertise and existing resources in Ivory Coast: one is Dekel’s move into cashew nut processing and the other is a clean energy joint venture, where palm oil waste will be used as feedstock for a biomass burner.
“We see ourselves as not a palm oil or a cashew company, we see ourselves as a logistics and processing business in partnership with small holders,” says Moore.
“So within that framework there’s palm oil, there’s cashews and there’s other opportunities we’re looking at.”
In cashews, he says nuts will be produced for export by the end of 2020, as infrastructure works are being prepared before milling equipment arrives from Italy later in the year.
“It’s a very similar model to palm oil, so we’re dealing with thousands of small cashew producers, we buy their raw cashew nuts and process them to produce the cashew for export, probably Europe and the US.
“We think the economics and demand of cashews is going to improve, like palm oil, given lack of planting, which we think is going to continue to push the price up. Hopefully the cashew processing plant will be commissioned by the end of the year.”
The clean energy JV has been set up with established renewable energy Green Enesys around an agreement to develop an initial 35-36MW hybrid power project, potentially near Dekel’s Ayenouan estate, where Dekel will supply empty fruit bunches left at the end of the oil extraction process, which will be complemented with a solar photovoltaic plant.
“This is undergoing a detailed feasibility study now with discussions underway with the government. The next point is to agree on the price we will sell to the government and to understand the permitting process.”
Sustainability and palm oil
With all the talk of environmental, social and governance (ESG) issues in business, some investors may have second thoughts about investing in palm oil producers.
Moore says there’s been “a lack of balance in the discussion”, pointing out that Dekel and fellow members of the Roundtable on Sustainable Palm Oil (RSPO) are focused on sustainable growth.
He highlights that palm oil has environmental and social advantages over other sources of vegetable oil such as soya, not least a huge disparity in the efficiency in oil production.
“Right now you have 20mln hectares of palm worldwide producing more vegetable oil than 120mln hectares of soya, which is the main other type of vegetable oil.”
In other words, for every hectare of palm oil that is not planted you have to plant around six hectares of either soya, rape seed or sunflower to cover for it. Palm oil is therefore a very efficient way of producing vegetable oil compared to soya.
“As well as being less efficient than palm oil, soya also requires more irrigation and over 50% of it is used in animal feeds, so it goes into the whole animal, cattle complex and the issues around that. Soya also does not employ many people. Palm oil is all manual harvesting, manual fertilising, and we work with hundreds, thousands of local farmers.
Moore feels the biggest endorsement for Dekel’s model and operations comes from AgDevCo, the UK government-backed investor, which owns 9.7% of the company’s shares after buying in last year and also providing senior debt.
Moore says: “If you take a look at AgDevCo’s website it lists a proven business model, a strong management team, the potential for long-term growth, and the potential to have a positive impact on people, economies and the environment among its investment criteria. It is therefore highly encouraging that AgDevCo saw fit to invest in Dekel.”