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DekelOil charts a route to early cashflow and profitability

Published: 18:00 04 Apr 2013 AEDT

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Palm oil specialist DekelOil (LON:DKL) breaks the mould for a new AIM float: it is fully funded and has a clear and quick route to cash generative profitability.

The upshot is the company’s new shareholders are unlikely to be called on to shoulder the costs of an expensive build-out of the business.

What’s more, a large chunk of the 27.4mln euros of debt finance available to develop Dekel’s palm oil plant in the Ivory Coast has come from development banks.

This means the project has undergone rigorous scrutiny that serves as third party validation of its potential.

The key milestone this year is the construction of the mill capable of handling 60 tonnes of fruit an hour, which will make it one of the largest in West Africa.

This task, which is being carried out by Modiplam, an internationally renowned palm oil mill contractor, is slated for completion by the end of the year.

Located just two hours from the international port of Abidjan, the operation at Ayanouan has a clear route to export the raw product.

According to director Lincoln Moore, there is a healthy domestic market for palm oil, which is a food industry staple, while the latest data reveals West Africa is currently importing 600,000-700,000 tonnes a year.

So, addressing this significant opportunity will be the first imperative before Dekel’s output is shipped off to Europe and further afield.

Feeding the company’s facility will be hundreds of locals whose small holdings cover a not-insignificant 27,000 hectares.

Supplementing that will be the company’s own estate, with 1,900 hectares already planted. The aim, eventually, is for 25-30% of the fruit to come from Dekel’s plantation.

With annual production potential of 70,000 tonnes of crude palm oil, Ayanoun would be the second-largest producer of palm oil in the Ivory Coast behind Palm-CI, part-owned by Wilmar, the world’s largest palm oil company.

Unlike some of its near neighbours, the country is no stranger to commercial scale farming, being the world’s largest producer of cocoa, with coffee and rubber also significant contributors to gross domestic product.

This has positive implications for newcomers such as Dekel as it means machinery, fertilizer and farming expertise are on tap, making the cost of production far cheaper than it might be elsewhere in West Africa.

The Ivory Coast is one of Africa’s fastest growing economies, but as the 2010 elections show, the country is prone to bouts of instability – although nothing approaching the chaos seen elsewhere on the continent.

“During that hiatus period things did slow down for us,” said executive director Moore. “The French are massively invested in the country, particularly the utilities, so any disruption tends to be minimized.

“Now the economy is booming, and this is from a much bigger base than other neighbouring countries. It is the second-largest economy in West Africa.”

The company’s nursery operation helps to nurture the goodwill of the local farmers (as well as provide new stock for the plantations).

The state of the art-facilities create palms that can be planted in six months – which is three to six months earlier than the industry average – and take as little as two years to deliver their first yield.

The clincher, for the local population at least, is Dekel’s high quality palms are priced competitively when compared to other local suppliers.

“So when we open for sale the queues might be 100 metres long. It helps with our relationship with the small-holders,” explained Moore.

Working with the 5,000 or so smallholders signed up by Dekel is just one leg of the plan.

It is also in the process of establishing its second project in Guitry, 180km from the coast where it holds rights over 24,000 hectares of land suitable for oil palm development.

The large majority of this land is old cocoa estates so the cost of development should also be cheaper than its West African neighbours.

Moore said: “The objective with the second site is to finance its development primarily from cash flow from the first site and sensible gearing, thereby minimising dilution for existing shareholders.”

A back of the envelope calculation suggests the initial, smallholder supplied operation should produce revenues of around US$56 million a year, based on the current spot price for palm oil. A reasonably predictable 25-30% margin makes this a fairly profitable operation.

Dekel’s owns 51% of the project. The remaining 49% is held by the Siva Group, the Singaporean agri-giant. “They have been a very good partner for us and will continue to match our investment in the project,” said Moore.

The driving force behind the business is chief executive Youval Rasin, a businessman active in the Ivory Coast for over a decade.

The agricultural expertise is supplied by highly regarded local expert, Dr Benjamin Adon, and Moshe Yetiv, from Israel, a country renowned for turning arid, stony desert into arable land.

Engineer Karl-Heinz Schmelzer is in charge of mill operations, who as, the name suggests, is German.

New to the market, it may take some time for investors to pick up on the value inherent here.

But barring any material slippage in the timetable, Dekel will be fully operational for March 2014, the first of two peak harvesting periods that coincide with the Ivory Coast’s rainy seasons.

The group is confident it can produce around 40-50,000 tonnes of palm oil in 2014 compared to a total capacity of around 70,000 tonnes. This gives it a little wiggle room during the ramp up, but it also provides it with the opportunity to surprise on the upside.

And even at less than full capacity Dekel should still be decently cash-generative.

Moore and his team believe that as the group reaches and passes major landmarks such as the completion of the plant and first production, the share price will start to reflect the progress made.

At 1.07 pence, valuing the group at just £14mln, none of the potential is factored in.

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