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Nigeria’s largest palm oil producer, Presco plc (NGX:PRESCO) earns an attractive rating according to my stock rating methodology, driven less by price than the power of its economics and a valuation that is reasonable-enough to justify investment. The reader is invited to see the accompanying spreadsheet while analysing Presco. Presco is uniquely positioned to benefit from a mix of favorable macroeconomic trends, regulatory barriers, and supply constraints that support elevated palm oil prices. While valuation alone does not make it an outright bargain, Presco’s superior economics, competitive positioning, and high-quality earnings suggest significant upside potential. With global palm oil demand continuing to rise due to its ubiquity in food, cosmetics, and biofuels, supply-side constraints, both in Nigeria and globally, create a compelling investment case. Presco’s deep vertical integration, geographic advantages, and strategic market positioning place it at the forefront of this high-growth industry. Investors should consider the risks of climate volatility and policy shifts, but for those with a long-term view, Presco represents a rare opportunity in the African agribusiness sector.
Restricted Supply and Burgeoning Demand Support Rising Prices
Palm oil, an edible vegetable oil extracted from the many clusters of fruit called fresh fruit bunches of oil palm (Elaeis guineensis) trees, has three main end products: crude palm oil (CPO), which is squeezed from the fruit of the oil palm trees and is mostly used as edible oil; palm kernel oil (PKO), which comes from crushing the kernel in the middle of the fruit and is used in cosmetics; and palm kernel cake, which is made from the remaining kernel after the palm oil has been extracted and is used as animal feed. According to the World Wide Fund for Nature (WWF),
Palm oil is in nearly everything – it’s in close to 50% of the packaged products we find in supermarkets, everything from pizza, doughnuts and chocolate, to deodorant, shampoo, toothpaste and lipstick. It’s also used in animal feed and as a biofuel in many parts of the world
This is due to the ease with which palm oil can be stabilized and their efficacy in maintaining flavour and consistency in ultra-processed foods. A 2015 study found that the average person consumes 7.7 kg (17 lb) of palm oil a year. The WWF found that two-thirds of palm oil consumption goes into food; nearly a third is used in industrial applications and consumer products such as cosmetics and cleaning agents, detergents, and soap; and 5% is used in biofuels, although the country-to-country mix varies.
Fragmented markets with goods in rising demand often follow what economists call the “cobweb model”: production rises to meet demand, given the lag between production decisions and price observations, a glut emerges, causing a collapse in the price of said goods. An investor’s task then is to question if there are reliable constraints on supply that support elevated prices. Vegetable oil economics are defined by restricted supply and rising demand, which has driven a surge in vegetable oil production and prices. Since the 1960s, vegetable oil production has grown markedly, with palm oil production outstripping the rest since 1978, and global palm oil production compounding at 7.34% a year. The reason is simple: palm oil accounts for a third of the world’s vegetable oils while utilising less than a tenth of its cropland. This productivity makes it ideal for meeting the world’s rising demand for vegetable oils. On a per hectare basis, oil palm yields are 11 times greater than those of soybeans, 10 times greater than those of sunflowers, and seven times greater than those of canola.
The Food and Agricultural Organisation (FAO) estimates that 50% more food must be produced in order to achieve food security by 2050. At present, the world is already off its 2030 goals for achieving Zero Hunger. This is particularly acute in Africa, the only region in the world with a growing population, with the third largest economy in Africa by nominal GDP and set to have a population of 312.7 million by 2040, and the 14th largest economy in the world by 2050, local demand for palm oil is likely to continue to grow. At present, Nigeria is a net importer of palm oil, as it struggles to scale production to meet domestic demand. Dr Celestine Ikuenobe, the previous head of the Nigeria Institute for Oil Palm Research (NIFOR), told the Nigerian Tribune that Nigeria requires 3 million tonnes of palm oil a year and is currently only producing 1.4 million tonnes a year.
Indeed, the government has worked to revive palm oil production since the turn of the century, making land available, and providing aid, in a bid to meet domestic demand and compete with Indonesia. Nevertheless, a combination of climate change and capacity constraints on the part of the Nigerian government have made it hard to properly grow palm oil production. Stagnating supply is not just a Nigerian story: production has fallen in Indonesia and Malaysia as well, despite rising demand, not only for food, but, crucially, for use in biofuels, as the shift from fossil fuels continues unabated. As with Nigeria, climate change and capacity constraints, not merely from the government, but from the financial sector, have made it hard to grow production.
Barriers to Entry Protect Presco
The most important of competitive advantages are barriers to entry. These barriers to entry are a function of the enormous transaction costs involved in creating a competing firm: the capital investments needed are high, with Presco’s invested capital as of 2024 being N238.67 billion, and there are regulatory constraints and land acquisition challenges that are hard to overcome. Presco’s deep relationships with local distributors and local communities place it at the head of the queue when it comes to acquiring customers and land. A rival would not only have to match Presco’s capital investments -as well as that of the other oligopolists-, it would have to break their relationships with local distributors and local communities. So, the industry dynamics not only protect Presco’s position, they tend to smooth the capital cycle.
In terms of regulations, it should be understood that regulations are, whether they are good or bad, a transaction cost. Concerns about the impact of environmental, social and governance (ESG) impacts of palm oil production have led to regulations such as the European Union’s Regulation on Deforestation-free Products (EUDR), exact costs for producers that will discourage the emergence of market entrants and protect large producers from competition. In addition, these costs are passed through to consumers, and Isabella Weber’s work on price controls suggests that “large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits”. In other words, firms have the ability to profit from supply problems. Regulations are likely to grow as the world tries to control the impacts of palm oil production on the environment.
In Indonesia, expansion has been further slowed by the number of land disputes the country’s 1,000 palm oil producers are involved in, such as those involving Astra Agro Lestari. In 2012 -I could not find later data-, 59% of Indonesia’s palm oil producers were involved in land disputes. In 2021, the country recorded 4,000 land disputes between local communities and palm oil producers.
Geographic Concentration Presents a Fertile Risk
Oil palm trees are native to west and southwest Africa, with the species name, guineensis, referring to the historic region of Guinea, as opposed to the modern-day state. In the last century, it has become naturalised in Madagascar, Sri Lanka, Malaysia, Indonesia, Central America, Cambodia, the West Indies, and several islands in the Indian and Pacific Oceans. American oil palm E. oleifera and the Attalea maripa, are also used to make palm oil.
Although Nigeria for a long time led the production of palm oils, it was supplanted by Indonesia and Malaysia decades ago, at a time when Nigerian palm oil production was essentially moribund at the end of the twentieth century. Largely through World Bank loans and governmental support, the industry was revived. In 2021, palm oil accounted for nearly 40% of the world’s production of vegetable oils, with around 56% of production emanating from Indonesia, and approximately 26% from Malaysia, even though there are 42 producers of palm oil across the world. Nigeria is the world’s fifth largest producer, responsible for just about 2% of global production. Globally, it is cultivated on large plantations and smallholder plots.
This state of affairs presents obvious risks, risks which the world has already experienced: on April 28, 2022, President Joko Widodo announced that Indonesia was suspending “cooking oil raw materials and cooking oil” exports in order to “ensure the national availability of cooking oil” and keep it affordable. That announcement was tempered a few weeks later, when the government exempted crude palm oil exports from the ban. Although the ban was lifted three weeks later, it revealed the risks inherent in the global production of palm oil, that any disruptions to production in Indonesia or Malaysia could send the price of palm oil soaring. Climate change and capacity constraints are likely to define the industry for the foreseeable future, making rising long-term prices more likely. Ex-Nigeria supply-side shocks will benefit Presco and the Nigerian palm oil industry as a whole.
Vertical Integration Deepens Dominance
The palm oil value chain consists of producers of varying sizes, processors, traders, consumer goods manufacturers (CGMs) and retailers. At the refining and internal trading level, the market structure is oligopolistic, whereas at the production level, supply is fragmented, with suppliers from smallholders to large plantations, and manufacturing encompasses a vast array of CGMs in a rapidly diversifying market.
Presco’s vertical integration is a consequence of the fact that it derives a competitive advantage from controlling the entire value chain from plantation to refined products: by owning its own oil palm plantations, palm oil mills, palm kernel crushing plants and vegetable oil refining plants, it can guarantee round-the-year supply of high quality speciality fats and oils, such as Palm Fatty Acid Distillate (PFAD), Crude Palm Kernel Oil (CPKO), Stearin, Olein, Refined Bleached Deodorized Oil (RBDO), and Special Palm Oil (SPO), while bringing transaction costs down, gaining cost predictability, and reducing dependency on fragmented supply chains. Not only does vertical integration drive down costs, it gains an ineffable advantage in innovation. An example of this is Presco’s addition of a Jerry can plant to bottle palm oil and vegetable oil in 5 and 25 litre jerry cans, so that they are more accessible by households.
Presco’s vertical integration, and scale advantages allow it to produce and sell larger amounts of palm oil with lower cost and higher quality, while spurring innovation and realizing higher NOPAT margins than the competition.
Soaring Growth with Record Profitability
Presco’s revenue has ballooned from N12.72 billion in 2019 to 198.16 billion in 2024, compounding at 58.64% a year, while its NOPAT has even more impressively ballooned, from N2.92 billion to N83.77 billion, compounding at 95.63% a year. In tandem, the company’s NOPAT margin has leapt from 14.82% to 42.28%, while its invested capital turns have improved from 0.65 to 1.04. As a consequence of rising NOPAT margins and invested capital turns, Presco’s return on invested capital (ROIC) has surged from 9.58% to 43.92%.
Owner-Operators Align Incentives for Success
Belgian agro-industrial firm, the Société d'Investissement pour l'Agriculture Tropicale or the SIAT Group has been involved with Presco since 1991, the year of Presco’s incorporation. Siat’s ownership and management of Presco, and the personal investment of its CEO, Felix Onwuchekwa Nwabuko, in Presco, mean that the interests of management and shareholders are properly aligned.
When Siat came on board, Presco operated from 2,700 hectares on the Obaretin Estate, a palm plantation that had previously been owned by the old Bendel State Government. Siat’s involvement came at the request of Presco’s controlling company, textile manufacturer, President Industries Nigeria Limited (PINL), who valued Siat’s experience in plantation investment and management in West Africa. Siat has grown its shareholding from 33% in 1991 to 50% in 1995 and then 100% in 1997 when PINL divested its shareholding in the company. Presco listed on the Nigerian Stock Exchange in 2002, with Siat retaining a 60% shareholding.
Under Siat’s management, Presco has obtained the 2,800 hectare Cowan Estate at Ajagbodudu from the Delta State Government; a further 6,500 hectares at Obaretin Estate, the 13,100 hectare Ologbo Estate from Edo State Government; and more recently, the 17,600 hectare Sakponba Concession in the Orhionmwon Local Government Area in Edo State, from where Presco will grow oil palm and rubber. Moreover, until 2021, Siat fully controlled Siat Nigeria Limited (SNL), before transferring its assets to Presco in order to deepen Presco’s vertical integration. SNL’s acquisition brought with it 16,000 hectares of oil palm plantations that SNL had bought in 2011 from the River States Government’s Risonpalm operations. In total, Presco has a land bank of 40,000 hectares, of which 25,000 are fully planted.
Rasheed Sarumi represents Siat on Presco’s board as chairman. Nwabuko serves on Presco’s board as a non-executive director and has direct and indirect interest in Presco, totalling 151,700 units. Nwabuko, who previously served as the managing director of Presco and SNL from February 2015 to March 2024, was succeeded by Reji George as Presco’s managing director.
This alignment of interests is manifest in the growth of Presco’s ROIC -which, as aforementioned, grew from 9.58% in 2019 to 43.92% in 2024-, and economic profit. I found that Presco’s economic profits swelled from N2.45 billion to N46.96 billion between 2019 and 2024.
Presco Has Further Upside
At the present price of N750/share, Presco is trading at a 119.6% premium to its economic book value (EBV). this is hardly “attractive” as I have signaled. My stock rating methodology balances earnings quality and valuation to assign stocks into a bucket somewhere between “very unattractive” to “very attractive”, and Presco scored as attractive, thanks largely to its earnings quality and an attractive MICAP that underestimates Presco’s competitive positioning.
The company’s price-to-EBV (PEBV) ratio of 2.27 implies that the market expects Presco to grow its NOPAT by 127% from current levels with a market-implied competitive advantage period (MICAP) of just six years. In order to grow NOPAT by 117% from current levels, over the next six years, Presco would have to grow revenue by its 3-year compound annual growth rate (CAGR) of 33.11%, while maintaining its 3-year NOPAT margin of 31.47%. As these operating hurdles are within Presco’s historical range, they are fairly achievable, even though they are aggressive.
If Presco can grow revenue at its 5-year CAGR of 58.64% over the MICAP, while maintaining its 3-year NOPAT margin, the stock is worth N2,104/share today, an upside of 180.5% from the present price.
One can of course foresee catastrophe: while the markets expectations are rooted in Presco’s operating achievements, fall in revenue growth to a still-high 20%, due, say, to climate induced disruptions, while maintaining 3-year NOPAT margins, would mean that the company is worth just N227/share.