Investor’s currently eyeing where best to gain exposure to capital upside on the markets, could perhaps do worse than home in on the area of commodities.
It’s a field that encompasses a vast range, from metals such as copper, to foods like corn and palm oil, where the latter is used extensively in edible products and even everyday cosmetics.
At present, the commodity sector is in hot demand and looks set to at least maintain the recent momentum where specific stocks and sectors have already seen significant upside delivered.
Within this mix, palm oil prices have also been on a sharp upward trajectory and in relation to that, one company which has recently cropped up on my radar again is Dekel Agri-Vision (DKL) where the shares at the time of writing are sitting at an attractive 4.9p per share.
That is some way off the level achieved when I followed the company a few years back, which in 2017 had the shares hitting 15p, and also saw the company paying a dividend.
Unfortunately for shareholders here, the projected growth and optimism for increased returns back then was somewhat derailed, due to a combination of factors that conspired against the company.
Not least, a serious and unwelcome collapse in the price of palm oil as Executive Director Lincoln Moore has explained to me in a catch up call.
Moore says, “at that time, we had to contend with prices that were at their lowest levels and that was for two years in a row, so the company really just had to defend itself through what was a torrid period”. Despite that, he adds that through the difficult time endured, the company was nevertheless continuing to plan for the longer term future as they knew that at some point, prices would rebound.
Fast track to the present and palm oil prices have subsequently hit a ten year high which is excellent news for DKL and its shareholders, where combined with a now restructured balance sheet the company is in a solid position for decent growth. The companies palm operation is located in the Ivory Coast (Cote d'Ivoire) where it has a portfolio of projects at various stages of the development curve.
These are led by the fully operational palm oil project in Ayenouan where fruit produced by local smallholders in addition to c.1,900 ha of company estates is processed at the Company's 60tn/hr crude palm oil mill.
As part of the wider aspirations and drivers for growth, there is also a large scale cashew processing project evolving in the same country, which is due to commence production in the coming months.
A third aspect within the business model sees prospects for DKL across the biofuel space. Although Africa is often perceived as a risky environment for investors, Ivory Coast has a relatively stable backdrop where, as the world’s largest exporter of cocoa beans its citizens enjoy a relatively high level of income compared to other countries in the region. Whilst many people readily and rightly associate palm oil production with Indonesia, Ivory Coast nevertheless harvests around 2.4 million tons of palm kernels per annum which in turn, produces circa 500k tons of crude palm oil.
As part of the chain, DKL looks very well placed now to make real and sustainable progress with its interests, which should provide for potentially serious upside for shareholders in both the near and longer term.
Recent news flow from the company has been extremely positive which last month resulted in DKL announcing record crude palm oil production volumes for the month of March.
That has now been followed up by an update for April numbers, which although not achieving the same levels as the previously extremely high performing months, nevertheless continue the positive trend with strong prices being achieved. Moore certainly sounds comfortable and confident with where the business is now at, along with optimism for the prospects of scaling up and delivering on the growth ambitions and a sustainable return to positive EBITDA.
He believes that across the commodity space, food related aspects have to date largely been overlooked, but that could now begin to change. “Food prices have gone up dramatically” he says “and that includes, corn, wheat, cattle and of course palm oil and this has happened through a period of relative lock-down.”
He sees the delivery of supply for demand over the medium term as being a real challenge and as a result, believes strong prices will prevail for quite a while.
Over the last couple of years palm oil was something that perhaps suffered the most from environmental groups and in particular lobbyists in the US who were pushing the cause for soy producers.
This was largely to protect their under pressure interests, where Moore adds that they are very much unable to compete with palm oil on price, hence a reasoning for the targeting of it.
However, the sentiment has since reversed somewhat and thus, subsequently impacted on the soy industry, which in turn has proven beneficial to the palm oil market and its players.
With demand and prices strong, Moore says that DKL has been looking to build on that momentum and he sees the first six months production as being 30/40% higher than that achieved last year. “We are going to return to a mature EBITDA result in the palm business when we report our half way results, which will result in our returning to the 2017 levels and that should see us pushing towards €5m of EBITDA for the year. The business is going well and we are paying down debt as the cash comes in, although we are also keeping some cash aside”. He adds that DKL has also increased its stake to over 70% in the cashew business it is developing, which in time will bring greater margins and has potential for a larger scaled operation.
This should resonate with investors as Ivory Coast is now ranked up with India and Vietnam as one of the World’s leading exporter of cashew nuts, which suggests that DKL with another string to its bow could deliver extremely positively from this area in the coming years.
At present, the production facility is not yet operational but isn’t far away, as Moore says that they are now coming to crunch time as the construction is fast advancing towards commissioning and there will be an update on progress to the market in a couple of weeks time.
On the back of that, he says that they are looking at commencing production in July and although he anticipates that there may be some bits of fine tuning, the tone is bullish. “The machinery we have should see 80% of the whole nut being retained in the crushing process which is important, as you can achieve a 30% higher price from retaining all of the cashew after extraction”.
Worth noting, is Moore’s revelation that they are aware of another plant in the country using very similar machinery, which is actually, achieving a 87% result and that arguably adds to the potential for DKL to deliver. “We actually modelled on 60%, so if we do get the 80% that will be great as part of the first stage, which will then be followed up by the exporting to clients in the US and Europe”.
He also stresses that there will be a focus on achieving the best routes and prices to and on the market and the expectation is for the cashew operation to be cash flow positive by the end of the year.
Management in place is strong and experienced and confidence appears high on that delivery moving forward.
Looking at 2021 Moore says that the mill will be able to do 10k tons of raw cashews, although that is based on running two shifts which could be upped to a third with the aim to increase to 30k tons. “It’s a really critical time for us now, with one business cash flow positive and the other moving to production and then a third in the background”.
The latter reference relates to the production of clean energy at both sites and Moore says that they are already having conversations with government about this.
Despite the shares being well ahead of their 52 week low point, at the current price they remain someway off the broker fair value price of 9p.
Indeed, if the numbers by the broker in question Allenby are achievable over the next couple of years, then the shares look like an attractive and exciting buying opportunity.
To date Allenby is looking for 2021 revenues of €35.3m and EBITDA at €4.7m which moves to €44.3m and €6.6m in 2022.
Adjusted pre-tax profits in both years move positively with the 2021 forecast of €0.6m increasing to €2.5m the following year, although, depending on how fast the cashew business accelerates those numbers could prove rather conservative.
Moore adds that the two-three year plan will see the business move towards a revenue goal of €100m and EBITDA nudging towards €20m. If all goes according to plan then the share price should react positively and head northwards, where at the current time based on the 2022 expectations the stock trades on a PER of little more than 14.
The performance of the cashew operation will be key to further driving cash generation and if things get off to a positive start with momentum building quickly, then there is every possibility of an upgrade further down the line.
A key positive at the credibility end of business is the now strengthened balance sheet where Moore explains on what was undertaken.
“We took the decision to restructure debt and the balance sheet to enable us to be best suited to deliver on growth.
In July of 2019 we brought in AgDevco and earlier this year we secured a bond facility that has a three year capital grace. There has also been an equity raise, so the balance sheet is much stronger and positions us well.”
Moore is clearly chomping at the bit and eager
to push on and in time would like to see the business achieve a much greater rating that would attract other Institutional investors.
At present, the highly respected Miton is on board here and he tells me another, as yet not revealed well known UK name also came in on the fund raise, while he is also delighted to have AgDevco in the picture as both a supporter and investor. The latter, is a UK government backed social impact investor that provides extensive support to businesses in the African agriculture sector where it is one of the most active in the investment field and provides for a solid guarantee for DKL. With all seemingly going well and according to plan I am keen to know how Covid has impacted on the region and whether it has been, or could be, an issue.
Moore says that DKL actually operated with relatively little disruption and that compared to other countries, Ivory Coast had faired pretty well with a predominantly young population. What did impact in the short term, was the knock on effect from the world effectively freezing, which saw commodity prices dipping sharply at the outset of Covid.
Palm oil certainly wasn’t immune from this and suffered for a short period, but soon began to recover as Moore explains. “Much of the reaction was really due to speculation as in reality, physical stock levels across the world were already tight. So, once the first lockdowns ended there was a sudden realisation that things were actually really quite tight and prices began to recover. The main impact for us was on pricing, which means in our 2020 numbers we will probably report EBITDA of €1m but that would most likely have been around €3m without that price disruption". Although analysts covering commodities are divided on the range in which palm oil will trade through the remainder of this year and into next year, the World Bank is expecting strong prices to prevail.
It is forecasting the palm oil price to maintain current levels through the year with an expectation of staying above the $900 mark until at least 2025.
Equally, the prospects for cashews looks promising and DKL’s arrival on this front may prove well timed, particularly from an African perspective.
The United Nations Conference on Trade and Development (UNCTAD) has recently delivered a report where it says Africa, although having a large presence in the market is largely missing out on a global boom for cashews, largely due to a lack of processing industries.
It states that in recent years world trade in cashew nuts has more than doubled and now stands at over 2.1bn kilograms, suggesting that there is a big opportunity in the export space. No doubt the prices in both palm oil and cashews will fluctuate like other commodities as we move forward, but even allowing for some easing from the highs, the trend looks set to remain positive and provide a real window of opportunity for DKL.
The company isn't quite the finished article yet, but it appears to be in a decent spot with the window open for the generation of serious levels of cash, if it can now go on to deliver.