Uncovering the potential of Benso Oil Palm Plantation for growth

Uncovering the potential of Benso Oil Palm Plantation for growth

Ticker: GSE BOPP

Industry: Agriculture Sector

Sector under GSE:  Consumer Goods

INDUSTRY: AGRICULTURE

SHARE PRICE (28/07/23): GH₵14.00

RECOMMENDATION:

Short-Term BUY Target Price (GH₵ 18.95)

Long-Term BUY Target Price (GH₵ 43.09)

POTENTIAL UPSIDE: 208% LT, 35.3% ST

Company Description

Benso Oil Palm Plantation (BOPP) is a distinguished Ghanaian agricultural enterprise situated within the Western Region of Ghana, specifically at the Adum Banso Estate. Recognized as one of the venerable agricultural entities enlisted on the Ghana Stock Exchange, BOPP holds a notable heritage.

Functioning as a subsidiary of Wilmar Africa Limited, BOPP finds its ultimate parent company in Wilmar International, an entity incorporated in Singapore. The principal focus of BOPP’s operations revolves around the cultivation of oil palm trees and the subsequent processing of palm fruits to yield both crude palm oil and palm kernel oil.

Notably, the initial quarter of 2023 witnessed a remarkable surge in BOPP’s revenue by an impressive 45%. Moreover, in the year 2019, BOPP embarked on innovative strategies to extract value from its by-products. The sale of sludge palm oil emerged as a lucrative avenue, contributing substantially to the company’s earnings. Since its discovery in 2019, the income derived from sludge sales has demonstrated a notable ascent of 17%, translating from GH₵930,000 to GH₵1,092,000 up to the present.

Performance History

GROWTH ANALYSIS

PROFITABILITY

KEY RATIOS

COMPARABLE ANALYSIS

Benso for the past two years has been outperforming its peers in the consumer sector.

P/E ratio for Benso stands at 3.04, much lower than the other comparable.

Key reason for Benso’s great victory stems from imperfect competition in the sector, as such comparable used are not entirely favorable.

Valuation

Over the past four years, Benso Oil Palm Plantation has consistently displayed indicators of strong liquidity, minimal gearing, efficient operations, and notable profitability. Even during the challenging period of the pandemic (2020-2021), the company achieved some of its most favorable profit margins.

The debt carried by Benso primarily stems from its subscription to lease liabilities, resulting in a low gearing ratio. This judicious approach significantly mitigates financial risk and allows all profits to be channeled toward equity holders.

While direct comparable companies are lacking on the stock exchange, Benso Oil Palm Plantation remains undervalued despite its P/E ratio of 3.0x, in contrast to the industry average of 9.3x within the Ghanaian Agricultural sector.

In the previous year, Benso experienced a noteworthy Weighted Average Cost of Capital (WACC) of 37.8%, largely attributed to economic shocks among other factors. Notwithstanding these challenges, the company managed to sustain high dividend payouts and observe appreciation in its stock value.

Presently, Benso’s Weighted Average Cost of Capital stands at 31.89%, indicating a decrease from the prior year’s high level. This decline mirrors the improved economic conditions, leading us to anticipate further decreases in the WACC over time. Despite this high WACC, Benso remains an attractive investment option, delivering substantial value to investors with objectives encompassing both dividend returns and capital gains.

• Valuation (Discounted Cashflow)

Using a WACC of 31.89% and a growth rate of 4.8%, we estimated BENSO share price to tick up to GH₵ 43.09. Growth rate is based on the quarterly real GDP growth rate of the agriculture sector.

Using a P/E ratio, we estimated BOPP share price to be GH₵ 42.85.

Combining all the averages of the multiples, we end up with a share price of GH₵ 18.95.

OTHER TAKEAWAYS

• HIGH DEMAND

Demand for PKO expected to increase in 2022-2028 which would lead to higher revenue and with sustainable COGS margin, it would result in higher net operating profit margins.

• INCOME CATALYST

From 2019 up until now, Benso has been making huge profits from the sale of sludge oil. Productions of Sludge palm oil will drive profits up.

• SUSTAINABLITY (GOOD WILL)

Sustainable operations and recognized by RSPO and Ghana Club 100, this translates into goodwill and makes Benso an attractive company to high net-worth individuals. It also leads to less regulations on the company.

Industry & Economic Analysis

INDUSTRY ANALYSIS

Using the Michael Porters five forces

• Power of suppliers (PoS) – Low.

Benso is in the involved in the not just the processing of palm oil and palm kernel oil, they actually produce the raw materials for these oil. They engage in vertical integration and as such have low need for inputs. In fact, Benso is a supplier to neighboring countries and Wilmar Africa. Their PoS is therefore low

Substitutes

There are many small-scale palm farmers Benso can get its supplies from.

Forward integration

Since the company operates on a high scale the company does not run under the risk of forward integration from its suppliers.

All this gives BENSO a higher bargaining power over its suppliers hence, this makes the company becomes the one negotiating the price.

• Power of buyers (PoB) – Low.

Although oil is an undifferentiated product and has high substitute, BENSO’s buyers or customers are large consumer goods manufacturing company like Unilever and Wilmar Africa etc. Most of their oil is sent to Wilmar Africa, their parent company in Ghana and it is used in the production of frytol, bar soaps etc. As such, regardless of the increase in the price of say, frytol, soap and other goods that require the input of palm oil or palm kernel oil will still be demanded and since they supply to more than one company, they are not entirely affected.

• Competition in Industry – High

There are a number of competitors in the agricultural industry which makes competition high. Companies like Okumu Oil Palm Company, Twifo Oil Palm etc.

Also, the country BOPP operates in, is a country that favors agriculture the most, and as such government encourages youth to enter the agricultural sector. With such encouragement, there is the prediction of more competitors entering the industry which will in turn raise the competition level for Benso.

Although BOPP has a lot of competitors in the agriculture sector, most of them are not listed and not widely known which give BOPP a competitive advantage.

• Threat of substitutes – Low.

We believe Benso has low threat of substitutes. As mentioned earlier, Benso supplies to big manufacturing consumer goods company and its products are used an input for the making of other finished products such as soaps, cooking oil, margarine etc. As such regardless of the increase in the price of Benso’s product, the company is not really affected. Its products will still be demanded regardless.

• Threat of new entry – High.

As previously stated with the competition in the industry, the political nature of the country favors more entry into the industry, as such any barriers will be removed to allow for free entry into the market.

We predict the number of competitors to increase in the coming years.

With that said, Benso makes impressive growth, cultivates sustainably, engages in best management practice and have been recognized by Ghana Club 100 and also has been certified by RSPO. All these achievement, makes Benso quite competitive in the market.

ECONOMIC ANALYSIS

GDP Growth: During the initial quarter of 2023, Ghana’s real Gross Domestic Product (GDP) witnessed a rise of 1.1%. Notably, within this economic landscape, the Agriculture sector emerged as a significant contributor, marking the second highest GDP growth of 4.8%.

Inflation: An upward trajectory in inflation rates has been evident, with figures surging from 50.3% in November to 53.6% in January 2023. Subsequently, inflation has exhibited a fluctuating trend, currently resting at 43.1%.

Government Debt: A successful restructuring of the country’s debt has transpired, with approximately 85% of debt holders actively participating. This restructured debt arrangement has enabled the government to execute strategies outlined in the post-Covid-19 program for Economic Growth.

Possible Implication for BENSO

A positive outlook prevails as robust economic growth is anticipated to drive higher profits, facilitated by increased consumer spending within the economy.

Subsequent to the debt restructuring of the economy, a shift in investor confidence has been witnessed. Specifically, diminished faith in government securities markets has prompted a shift toward stocks as a more favorable investment option. In this context, we hold the belief that Benso Oil Palm Plantation (BENSO) is well-suited to feature in an investor’s portfolio.

Recommendation

Based on our comprehensive analysis, we confidently propose a dual investment recommendation: a SHORT-TERM BUY and a LONG-TERM BUY. Our target prices align at GH₵ 18.95 and GH₵ 43.09, respectively. These recommendations reflect our assessment of the company’s current performance and its potential for sustained growth in both the short and long run.