15 November 2018 : Analysts have engaged with management of Okomu following the release of its nine-months 2018 result and thus revise their estimate for FY 18E and FY 19F.

While analysts hold their views on Q4 volumes and input cost, nine- months run-rate informs some adjustment to estimate. On volumes, the impressive run in volumes over 9M 2018 (+10.5% YoY to 32,032 MT) informs a revision to FY 18 revenue of N20.3 billion (+7% YoY). Furthermore, given the abysmally low input cost in Q3 18 relative to trend levels1, analysts have revised their FY 18 cost of sales estimates lower by 15.7% to N4.1 billion (previous: N4.9 billion) and made slight adjustment to FY 18E their interest expense estimate (+38% YoY to N380 million) in line with 9M 18 run rate of N332 million.

Over in 2019, analysts anticipate a modest growth in CPO volumes which brings their CPO sales expectation for 2019 to N16.3 billion. Father out, from 2020 analysts anticipate boost to Okomu’s production emanating from the harvest of fresh fruit bunches from its extension 2 plantation. As a result, analysts have increased their FY 20-22F sales forecast by 12% on average. Overall, the upward revision to their sales forecast over the medium term informs their decision to raise FVE by 6% to N97.75 (previous: N92.45) thus, analysts maintain their STRONG BUY rating on the stock. On their 2019 numbers, Okomu trades at a forward P/E of 8.55x relative to 9.2x for Presco and Bloomberg Middle-East and Africa (MENA) peers of 13.5x.

Cost pressures to drag Q4 18 to the mud. Following the impressive run in volumes over 9M 2018 (+10.5% YoY to 32,032 MT) analysts made upward revision to their volumes estimate (+8%) and revise their FY 18E revenue higher by 7% YoY to N20.3 billion. Furthermore, incorporating Q3 18 results, analysts have revised their FY 18 cost of sales estimates lower by 15.7% to N4.1 billion (previous: N4.9 billion). Based on the new adjustment, analysts now expect cost of sales of N2.1 billion over Q4 18 which would translate to a 3% YoY growth cost of sales over Q4 18. Their expectation for input cost pressure over the last quarter is hinged on the pass through of seasonal related cost emanating from higher wage cost linked to the planting season and repair and maintenance cost incurred usually in the last quarter of the year. Against this backdrop, analysts estimate FY 18E gross margin to contract 60bps YoY to 78.5%. Furthermore, analysts raise their interest expense estimate by 38% YoY to N380 million in line with 9M 18 run rate of N332 million. Net impact of this including higher operating expenses (+5% YoY to N5.3 billion) translates to a 13.3% YoY expansion in earnings to N7.2 billion in FY 18E.

Volumes growth buoy earnings outlook beyond 2018. Farther out into 2019, while the widening global CPO surplus (+28% YoY to 4.1 MMT in September 2018) provides scope for subsisting pressure on CPO prices, analysts see volumes supporting revenue in the period. Analysts forecast modest CPO volume growth of 7% YoY which brings their CPO sales expectation for FY 19F to N17.4 billion. The first set of acreage area planted in extension 2 in 2016 is staged to mature in 2019, but management guided to nurturing the palm trees in anticipation of reaping better yields in 2020 rather than harvesting them which implies stronger sales in the medium term. Hence, analysts have raised their FY 20-22F sales forecast by 12% on average.

 Notably, the inherent demand-supply gap in the market which currently stands at ~430,000 MT indicates that a ready market exists to cater for the higher volumes over the medium term.

In addition, given that Okomu exports all its rubber and enters into a forward contract with off-takers of its rubber, analysts hold the view that Okomu’s rubber sales over 2019 will be vulnerable to the persisting glut in the global rubber market which has depressed prices (-34% YTD). Thus, analysts model rubber sales of N3.8 billion over 2019 (FY 18E: N3.9 billion). Against this backdrop, analysts forecast a 5% YoY growth in combined FY 19E revenue to N21 billion.

Strong topline to support margins expansion. Analysts have revised their FY 19E input cost higher (+2% YoY to N4.4 billion) to capture modestly higher volumes over the period. However, with sales growth rising faster than input cost, gross margin is estimated at 79% (+50bps YoY), relative to 78.5% in FY 18E with related profit at ?16.7 billion (+6% YoY). Also, with analyst's FY 19E operating costs expectation of N5 billion (-6% YoY), analysts expect EBIT to print higher at N10.95 billion (+13% YoY).

In a recent discussion, management ruled out further expansion plan and hinted at little or no borrowings over 2019. Thus, analyst's model only takes into cognizance the new loan (N1.95 billion) obtained from the Bank of Industry under the Agriculture credit loan scheme of the Federal Government in April 2018 at a 10% interest rate with interest payment expected to commence in 2019. Furthermore, with the recent stability in the Naira, analysts do not envisage material foreign exchange losses in FY 19. Thus, analysts project interest expense at N422 million (vs N332 million reported as at 9M 18). Net impact of analyst's revisions translates to PBT and PAT of N10.8 billion (+12% YoY) and N8.8 billion (+12% YoY) respectively.

On analyst's 2019 numbers, Okomu trades at a forward P/E of 8.08x relative to 9.2x for Presco and Bloomberg Middle-East and Africa (MENA) peers of 13.5x. Analysts retain their STRONG BUY rating on the stock with their revised FVE estimate of N97.75 (previous: N92.45).

Reporting for EasyKobo on Thursday , 15 November 2018 in Lagos, Nigeria

Source: Damilola Olupona from ARM Securities Limited

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