1) Year-on-year growth falls short of estimate on price, cost pressures 

2) FY’18 earnings estimate revised lower on H1 miss 

3) Valuation revised lower on bleak price outlook 

Weak prices, high costs pressure earnings 

02 August 2018 ( Lagos): OKOMUOIL recently released its H1’18 results, reporting a modest 4% y/y increase in topline to N12.9 billion – lagging analyst's N13.5 billion estimate. The weaker than expected revenue was driven by a 23% q/q decline in top line in Q2’18, coming in 15% below the performance from the corresponding period in the prior year. The breakdown of Q2 topline showed a decline in both local sales (mostly oil palm – 15% down y/y to N5.1 billion) and exports (mostly rubber – 9% down y/y to N0.5 billion). Analysts attribute the top line miss to both moderating global CPO prices (down 17% y/y) as well as weaker than expected volume roll out. 

Furthermore, H1’18 EBIT declined 12% y/y to N7.0 billion vs. analyst's N7.4 billion estimate, pressured by a 31% y/y increase in operating costs (Cost of sales + Operating expenses). Notably, the jump in operating costs was driven by a low base in Q2’17 due to an unusually low Cost of sales of N23 million recorded within the period (Q2’18: N1.1 billion). Consequently, in spite of an 82% y/y moderation in Finance costs (following the payback of the €10 million Socfinaf S.A. term loan), PBT came in 11% lower y/y at N6.9 billion. Overall, Okomu reported a PAT of N5.9 billion for H1’18, down 5% y/y and 7% behind analyst's estimate. 

Bleak CPO price outlook to cap margins 

Analysts highlight a weak outlook for global and local CPO prices through 2018, driven by a combination of still-increasing product oversupply and expectations of weaker demand from major oil palm importers. So far, global CPO prices have followed this trend, dipping 6% in H1 and 8% in July alone. With many of the factors remaining the same, analysts expect this trend to continue for the rest of the year. Analysts expect lower global prices to put further pressure on local prices even as the stable FX environment makes importation attractive. Consequently, analysts anticipate weaker margins for oil palm producers in the full year. 

Valuation revised lower on price outlook 

Following the weaker than expected H1’18 figures, analysts have made some revisions to their estimates. First, analysts reduce their FY’18 oil palm and rubber price expectations to reflect global realities, arriving at a reduced topline of N22.2 billion (Previous: N24.0 billion). Analysts have also reduced their FY’18 EBIT estimate to N 10.2 billion (Previous: N11.4 billion), after adjusting for higher-than-expected operating costs. Overall, analysts revise their interest and tax forecast higher and cut their FY’18 PAT estimate to N8.4 billion (Previous: N9.8 billion). Consequently, their target price is cut to N86.02 (Previous: N94.59). 

Reporting for EasyKobo on Thursday 02 August 2018 in Lagos, Nigeria

Source: Onyeka Ijeoma from Vetiva Capital Management Limited