Agriculture is an age-long indigenous occupation and sector in Nigeria, which has metamorphosed over time, but remains a major focus of several administrations as they seek food sufficiency and provide raw materials for manufacturing.
From contributing an estimated 85% of the country’s foreign exchange earnings I n the 1960s, as much as 90% of national employment, while contributing up to 80% to the Gross Domestic Product, the sector is today a shadow of good old self.
To enable the agric sector recover its lost glory, the Nigerian government has since the not too distant past concentrated on the need for agriculture to be treated as a business, rather than a mere vocation and past-time. Aside from several incentives put in place by the government to encourage participation in the agricultural sector, the Central Bank of Nigeria continued to sustain various funds aimed at incentivizing the value-chains of various sub-sectors of agriculture, the most popular of which is the Agricultural Credit Guaranty Scheme which has been sustained over the years, just as new scheme are being rolled to support particular crops, at 9% interest rate. This was further reduced to 5% in the wake of the Coronavirus pandemic outbreak.
The sector’s began to lose its pride of place in the economy, when the nation’s youth population began to migrate to the various developing city centres in search of white-collar jobs, while abandoning agriculture which was being lebeled a vocation for failures and never-do-wells.
At some point, the government contributed by shifting preference to importation of everything possible with huge import duty waivers that made domestic produce seem inferior and even more expensive, owing to the nation’s decaying infrastructure. Worse still, the nation’s borders became scandalously porous, as mass smuggling of goods and farm produce, especially poultry became a thriving business.
Meanwhile, the government had from time to time encouraged the return back to the farm while, emphasizing on the outstanding reward available to the farmers. But as this move seems to be yielding profitable advantage, farmers were forced to abandon their farms by the heightened insurgencygoing on around the country. It all started from the northern part of Nigeria and, has now spread to other part of the country.
The government’s efforts at encouraging farmers and businessmen to invest in large scale agriculture or agribusiness, and the humble successes recorded in recent years have been laid to waste, with farmers abandoning their farms following the growing insecurity across the country. Mostly affected have been the northwest, which is the seedbed of banditry and the northeast that has become synonymous with the Boko Haram insurgency, with militants killing and maiming farmers and sacking whole villages, with government remaining seemingly helpless.
Add this to the sustained kidnapping for ransom across the country and the takeover of large e expanse of farmlands by nomadic herdsmen wielding sophisticated weapons and kidnappers raping women, killing farmers across the country, then the reason for the nation’s spiraling inflation, driven by cost of food items would become clearer.
Although there are other challenges such as the high cost of transportation, the epileptic power supply, and erosion in selected parts of the country, identified as causes of the food inflation, Investdata believes that the insecurity has done a lot of damages to the Nigerian agricultural sector, than any other factor. We cannot completely overlook the effect of the activities of Covid-19 on the sector, we would not also gloss over some positive impact of the pandemic on the sector. These include the enhanced focus on lending to the agric sector, encouraged by the CBN, at friendly rates and conditions.
Also, according to the latest GDP numbers, Agriculture GDP decreased to N5.26tr in the fourth quarter of 2020, but is expected to close this first quarter even lower at N4,951 billion according to Trading Economics global macro models and analysts’ expectations.
Narrowing down this report, we shall look at numbers from the few listed equities in the agricultural sector in the Nigerian Stock Exchange Official list.
Please note that the agricultural sector is divided into three sub-sectors on the Daily Official List, such as: Crop Production; comprising FTN Cocoa, Okomu Oil Palm and Presco; Fishing/hunting/trapping sub-sector which features only Ellah Lakes Plc. There is also the Livestocks/Animal Specialist sub-sector where Livestock Feeds Plc as the only player.
This report shall therefore be limited to the earnings reports from Livestock Feeds, Okomu and Presco, equities we believe are a fair representation of the sector under focus.
As noted above the company is involved in the manufacturing and marketing of animal feeds and concentrates. Although this sector was challenged by the closure of the boarder all through the year 2020, the management reported improved numbers from the first quarter to the third quarter of 2020, releasing impressive full-year interim numbers.
We note that prices of animal feeds increased during the just concluded year, especially following the ban on importation of corn, a major raw material for producing animal feeds, forcing livestock farmers into buying the products at exorbitant cost.
As of the end of the third quarter of 2020, Turnover Value of Livestock Feeds stood at N7.98 billion, as against N7.43 billion in the preceding quarter. Similarly, Profit for the quarter stood N224.80 million, versus N9.57 million in the previous quarter.
Meanwhile, at compounded value, Turnover builds from the N2.46 billion posted at the end of first quarter of 2020 to N4.91 billion in the second quarter and N7.98 billion in the third quarter. Meanwhile, interim result estimated Turnover at N11.17 billion. In the same trend, Profit after tax stood at N40.49 million in the first quarter, increased to N94.33 million at the end of the half year, and N224.80 million in third quarter of the year.
Going by the estimated N354.12 million at the end of the full year business session, we have estimated the full year Earnings per Share at N0.12, and Book Value at N0.64. See the above table for details.
Okomu Oil Plc stands out as leading stock in the agricultural sector of the NSE. As of the time this report, Okomu Oil sold for N99.00 per share.
We also note that the company is involved in the development of oil and rubber plantations, palm oil milling, palm kernel Processing, and sale of wet cup lumps. Research has confirmed that Okomu Oil cannot even fully meet demand of the Palm Oil in the country, talk more of supplying other African countries.
Meanwhile, its palm business is widely known as the most rewarding plantation in the world. In other words, Okomu Oil operates in a widely advantaged business terrain, and will only need to continually improve its production capacity for better earnings. Nevertheless, it is necessary to note that, the company is not free from the damaging claws of insurgence that is currently raging the country.
The management of Okomu Oil reported a total of N18.61 billion as the Turnover in the third quarter of 2020, compared to the N15.54 billion posted in the corresponding period of 2019. Meanwhile, the Turnover was doubled at the end of the second quarter as it reported N13.52 billion. Please note that Turnover stood at N18.61 billion in the third quarter of the year while the interim numbers predicted N23.41 billion Turnover for the 2020 business session. Similarly, Earnings per share was estimated at N2.13 in the first quarter, N4.20 in the second quarter and N5.24 in the third quarter of the year. Going by the interim numbers released by the company, EPS is estimated at N7.74 for the full-year.
Measured by performances, Presco followed in the agricultural sector of the Nigerian Stock Exchange, although we have observed that earnings in Presco trailed that of Okomu Oil Palm. As of the time this report was compiled, the share price of Presco was N70.55 each. It is important to understand that the business of Presco is mainly centered on Palm Plantation and Processing. In other words, everything that can be extracted from Palm tree is a product of Presco Plc.
Turnover moved from N5.37 billion in the first quarter 2020, to N13.45 billion in the second quarter, and N18.91 billion by the end of the third quarter of the year. Note that Turnover posted at the end of the third quarter of the year was N1the 5.19 billion. In the same trend, Profit for the year stood at N1.80 billion in the first quarter of the year, appreciated to N4.39 billion in the second quarter, and stood at N5.03 billion at the end of the third quarter business session. Going by the released interim numbers for the year ended 31st December, 2020, Earnings per share is valued at N10.66.
On the strength of the above analysis, we maintain high expectations from the Agricultural sector of the economy, believing that the several government efforts to encourage growth in the business are channeled in the right direction. Nevertheless, the incessant challenges posed by insurgency in the sector may completely frustrate those efforts. This sector has different categories of stocks classified into defensive growth and low-priced stocks. For defensive and relative return, look the way of Okomu Oil and Presco. An example of a growth stock in the industry is Livestock Feeds, while the low-priced or kobo stocks include FTN Cocoa, Ellah Lake, and others.
We would expect that the government takes seriously, the need to resolve the security challenges that have forced people, including investors to abandon their farmlands and encourage a return to agriculture, not as a pass-time, but as a business venture. There also a need for long-term policy formulation to drive the sector’s contribution to the economy, as we take seriously the need for food sufficiency as a nation, job creation, and economic diversification. All of these will encourage more investors into agribusiness, with a fair assurance of the risk-reward dynamics in the sector.