Thursday, January 17, 2019 10:18:17 AM- Nigerian Stock Exchange.

  Okomu Oil Palm Plc. (Okomuoil.NL)-Green Shoots or a False Spring?


 Upside Abounds. Shares of Okomu has returned +26% YTD, reflecting a remarkable 1st quarter 2018 performance wherein the company reported EPS of N3.64 (+13% YoY) on the back of margin expansion and lower debt profile. Going forward, the repeated concern in the mind of investors is if there is still room for upside on the stock. Following revision to our estimates, we arrive at a FVE of N102.33 which implies a 20.4% upside from current pricing. Our optimism is hinged on expectation of strong volumes growth, better operating efficiency, and lower finance cost over FY 18. Hence, we reiterate our BUY rating on the stock. Okomu trades at a forward P/E of 8.0x relative to 13.72x for Bloomberg MENA peers.

Strong volumes growth to mask lower CPO prices. Domestic CPO prices have faced a downtrend in line with global CPO prices, with prospect of widening CPO surplus (USDA forecasting a +51% jump in global surplus to 4.9 million MT)dragging global CPO prices with pass through effect on domestic CPO prices (-27% YoY to N391,969.44/MT). However, having recorded strong volumes growth in Q1 18 (+73% YoY to 16,091MT)—owing to better than expected harvest, we see scope for higher volumes over 2018 which would provide succor to FY 18 revenue. The current market dynamics where local demand for CPO currently outweighs supply further buttresses our outlook for volume growth in 2018 as such, we model a +16% growth in volumes over FY 18. Net impact of the decline in domestic CPO price and increase in volumes translate to FY 18 revenues of N21 billion (+3% YoY).

Improved energy mix will support margin expansion. In a bid to preserve margins, management guided to measures to keep costs lower over 2018. Specifically, the company mentioned that its plant is now connected to the national grid with Benin Electricity Disco Company (BEDC) accounting for 60% of its total power usage (previously 40%) while also guiding to plans to increase the usage to 70% over 2018 to keep energy costs lower. We believe the company’s improved energy efficiency reflected in Q1 18 as Cost of Goods Sold (COGS) dipped 48.2% YoY to N655 million. However, in line with past trends where the company records higher COGS at the tail end of the year due to the outset of the planting season, we see scope for cost pressures at subsequent quarters. Irrespective, due to the high base of the prior year, we forecast a 11% YoY decline in COGS to N3.8 billion over FY 18 which translates to a 340bps YoY expansion in gross margin to 82.5%.

Lower operating cost on the cards: In the first quarter of 2018, operating expenses increased by a whopping +116.1% YoY to N2.7 billion (Q1 18: OPEX to sales ratio: +15.49ppts YoY to 36.4%) which management linked to carryover expenses from prior quarter. In subsequent quarters, we expect a normalization in OPEX hence, we model an 11% YoY expansion in FY 18 OPEX which translates to a flat growth in OPEX to sales ratio of 25%. Thus, we forecast a 12% YoY jump in operating profits to N12.5 billion, which translates a 30bps jump in EBIT margin to 58%.

Lower finance costs bolster earnings: In Q1 18, Okomu scaled down its borrowing (Q1 18: N1.1 billion vs N1.3 billion in FY 17) following payment of its FCY loan (€10 million) owed to its parent company—SOCFINAF S.A. As a result, net finance charges dipped to N36.7 million vs N105.9 million in Q1 18. In our view, this provides leeway for lower finance expense over FY 18. Irrespective, given ongoing expansion plans, we expect a slight increase in gross debt to N1.5 billion (+20% YoY). However, management noted its preference for local borrowings, largely from the FG/CBN intervention. Thus, reflecting the paydown of foreign borrowings, finance cost is expected to print at N275 million (2017: N484 million).

On balance, we now look for FY 18E PAT of N10.1 billion (+11% YoY) with most of the gains expected to come from stronger volumes, greater cost efficiency and lower finance expense as opposed to the price-led gains of 2017. We have a FVE of N102.33 (Previous: N67.3) which implies a 20.4% upside from current pricing. Hence, we reiterate our BUY rating on the stock. Okomu trades at a forward P/E of 8.0x relative to 13.7x for Bloomberg MENA peers.


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