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MIDAS SHARE TIPS UPDATE: Palm oil producer offers healthy future for investors as well as Orang-utans

Palm oil has a dreadful reputation, with its production often devastating rain forests and threatening the habitat of orang-utans.

DekelOil aims to be different. Most criticism is levelled at producers in Indonesia and Malaysia, where orang-utans live. Dekel operates in West Africa’s Ivory Coast.

And many plantation owners are accused of mistreating local farmers. Dekel works with them to improve living standards.

Palm oil has a dreadful reputation, with its production often devastating rain forests

Midas last looked at the company in December 2015, when the shares were 1.175p. In June 2016, a one-for-ten share consolidation programme was launched. Shareholders received one new share in place of every ten held. 

Had that been in place in 2015, the price would have been 11.75p. Today it is 7.5 per cent higher at 12.65p.

The price has yo-yoed recently but the future bodes well for both the firm and its shareholders. Last year was tough for the sector.

The price of crude palm oil was at its lowest in more than a decade, and Nigeria’s currency plunged, cutting demand for imports. This hit Dekel, as it sells most of its oil in West Africa.

By contrast, 2017 has begun on a much brighter note for the industry, and Dekel has undertaken a number of measures to strengthen its business and boost production.

Last year, despite tough circumstances, Dekel’s sales rose by 12 per cent to just over €12 million (£10 million). The company reports in euros because the Ivory Coast’s currency is pegged to the euro.

Palm oil typically threatens the habitat of orang-utans.

The firm also raised production by 9 per cent to 39,000 tons and should deliver even higher production increases this year. Analysts forecast production will hit 45,000 tons in 2017, rising again in 2018.

Higher prices and higher production bode well. In 2016, the average palm oil price was €565 a ton. Today, it’s nearer €718 a ton and is expected to remain above €700 a ton at least until the end of the year. 

The firm underwent a financial restructuring last year – buying out a minority partner, refinancing bank debt on better terms and paying a maiden dividend. The exercise simplified finances and encouraged big investors.

Dekel is expected to release first quarter production and revenue figures this week, and these should make for encouraging reading.Profit for 2016 will be revealed in late April or early May, and analysts expect €2.6 million with a 0.17p dividend. 

In 2017, profits are expected to soar to €6.5 million, boosted by increased production and higher prices. Further strong growth is pencilled in for 2018 too, with rising dividend payments.

Dekel is run differently from most palm oil producers. Less than 10 per cent of its output comes from its own estate. The rest comes from local smallholders. It owns a nursery, where it grows palm seedlings. 

Small trees are then sold to local farmers to plant and nurture. They then sell the bunches of fruit back to Dekel, which turns them into crude palm oil in a modern mill.

This provides a secure livelihood for thousands of smallholders, and Dekel has furnished the local village with a school, medical centre and fresh water. 

The project even caught the attention of the World Bank, which now subsidises smallholders to buy seedlings from Dekel, boosting production.

Dekel’s mill has the capacity to produce more than 65,000 tons of oil a year, and there is room for growth on the current plantation. But boss Lincoln Moore is ambitious, and plans a second plantation, again near the economic capital Abidjan, and a third in Ghana.

Palm oil is a basic cooking oil in West Africa and elsewhere. But it is also used in foods, from mayonnaise to biscuits, as well as in soap, lipstick and cleaning products.

Demand in Dekel’s core market of West Africa is growing as living standards rise. Ivory Coast’s economy alone is growing at 9 per cent a year, boosting local appetite.

Midas verdict: Agricultural firms are never risk-free and palm oil prices can be volatile. But Dekel has a sound business plan and payment of a dividend highlights confidence in the future. Existing investors should hold. Adventurous punters should pick up a few shares at 12.625p.

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