By ARM Securities
Over FY 16, The Okomu Oil Palm Company Plc (Okomu) reported a nearly two-fold YoY jump in earnings buoyed by an upsurge in commodity prices (CPO and rubber) and the company’s focus on containing cost.
In view of the buoyant operating performance, the company raised its dividend per share to N1.50 (FY 15: N0.10) yet still had sufficient capital to pursue its expansion plans.
Going forward, the still favourable price regime as well as management’s cost containment efforts leave scope for sustained earnings growth over 2017.
Okomu reported its fastest pace of revenue growth in five years as favourable pricing environment drove sales at the Crude Palm Oil (CPO) segment to record high even as rubber turnover recovered from the 2015 trough despite weaker volumes (-8% YoY to 7,140MT).
Pertinently, the robust CPO sales in the review period was buoyed by higher domestic CPO prices—which reflected combined impact of naira depreciation and bullish global CPO prices (+13% YoY) that deterred imports (29% of total supply).
At the other end, cartel like cuts by major rubber producers bolstered impact of weaker currency on rubber sales, which are entirely exported.
Management linked the decline in rubber volume to the combined impact of wind damage and fire outbreaks on some portion of the company’s rubber plantation which forced some rejuvenation exercises on a section of the company’s rubber farmland.
Given the price induced revenue growth, Okomu reported a moderate rise in input (+5% YoY) and operating (+22% YoY) costs despite rising energy expenses.
According to Management, the benign cost is a fall-out of deliberate increase in import substitution—with imported raw materials now reduced to about 10% of COGS—and tight control on labour costs (65% of overall cost).
Particularly, over the period, the company reduced its full-time employees by 5% to 534 with the knock-down effect applying downward pressure on salaries and wages (-4.4% YoY to N2.4 billion). Consequently, operating margin rose to a record high of 48% (operating profit: +112% YoY). Further down, despite FX loss of N1.0 billion1 which underpinned a nearly three-fold YoY jump in net finance cost, strong operating performance ensured a nearly two-fold YoY jump in earnings to a record high of N4.9 billion.
Over 2017, we expect revenue growth to be tempered by recent retracement in domestic CPO prices from January 2017 peak of N732/kg2 which management linked to the sharp appreciation of the naira (incentivising cheaper imports), declining demand, and onset of the harvest season.
Nonetheless, reflecting the lower base in 2016, we project mean CPO prices to be 38% higher YoY at N423/kg.
The foregoing combined with higher volume (+7% YoY to 38,853MT), informs our forecasted CPO sales to N16.7 billion (+37% YoY). With regards to rubber, management’s guidance of sustained rejuvenation exercise over the financial year underpins our flat volume projection of 7,140MT.
However, reflecting recovery in global rubber prices (Q1 17: +94% YoY, 2017E: +44% YoY), we project a 44% YoY jump in rubber sales to N3.2 billion which brings overall turnover to N19.8 billion (+38% YoY), sustaining its double-digit growth for the third consecutive year, albeit at a slower pace.
On costs, as with 2016, we expect both input and operating cost to rise modestly, given the largely price induced growth in top-line.
In addition, management intends to increasingly substitute its biggest remaining raw material import (fertiliser) with domestic alternatives if available, or cheaper imports. Furthermore, the company intends to connect to the national grid over the year, which could reduce power cost by as much as 60%.
Given that significant progress on this front is not expected until towards the end of the year, we believe the company’s expanded plantation of 21,798 hectares3 should drive a 10% and 21% YoY rise in COGS and OPEX respectively.
Given the company’s sizable external debt of N1.2 billion (43% of total borrowings), we expect vagaries in the FX rate, which we forecast at N360/$ at the year end to induce a N300 million FX loss (-72% YoY) with the reverberating effect expected to drive net finance cost 57% lower YoY to N451 million. Bringing it altogether, we project FY 17 earnings to climb 80% YoY to N8.8 billion.
Largely reflecting strong earnings growth thus far, Okomu has rallied 30.7% YTD, as with peer Presco (+17.2% YTD) outperforming the broader NSEASI (-6.2% YTD).
The stock trades at current P/E of 10.20x (forward: 5.6x) vs. 11.61x (forward: 8.46x) for Bloomberg Middle East & Africa peers with last trading price of N52.51 at a discount to our FVE of N63.10.
We maintain our BUY rating on the stock.
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