Economy
Okomu Oil: Compelling Growth Story Despite Weak Earnings
By Cordros Research
We update on OKOMUOIL following the 2018FY results and our recent discussion with management. After the unimpressive performance in 2018FY, we forecast EPS to grow by 2.3% in 2019 and 24.6% average over 2020-2021E, with a TP of N93.62/s (previously N91.57/s).
Our revised estimate is driven by both the resurgent price of CPO and the expected boost to volume from additional mature plantations coming on stream both in 2020 and 2021, which should offset persisting energy cost challenges.
CPO volume growth will be muted in 2019: We estimate that CPO volume grew by +22.1% in 2018, supported by higher production from oil mills (+8% y/y) as previous acreage areas replanted matured. With no new maturities expected until 2020E, we do not see CPO sales volume exceeding 2018 level in 2019.
Management, in our recent discussion, guided to flattish to marginal CPO volume growth in 2019. However, we look for strong volume growth in 2020 and 2021, with a further 4,500ha of mature plantation expected to come on stream from Extension II each year, according to management.
Overall, we estimate 46,036MTs will be achieved in 2019 (+1.3% y/y), and volume growth to average 19.7% over 2020-2023E.
Higher selling prices will support revenue: Elsewhere, the narrowing glut in the global CPO market (c. 2,464kMT vs. 4,562kMT in 2018) potentially bodes well for CPO prices in 2019.
Given that domestic CPO price tracks global price, we expect that higher international market prices will pass through to domestic prices.
To buttress, while unfavourable weather conditions are expected to weigh on global supply, demand resurgence in India – which accounts for 15% of global consumption – is expected to lift global demand.
By implication, we project mean CPO price to be 5% higher in 2019 vs. 2018.
On the contrary, however, we hold the view that persisting global stock accumulation will continue to weigh on rubber prices, thus limiting the scope for export sales for OKOMUOIL. Overall, we project +6.9% y/y revenue growth in 2019E and 28.8% average over 2020-2021E.
Albeit with limited pass through to gross margin: We revise our gross margin estimate for 2019E 36 bps lower to 73.1%, reflecting continued CoGS pressure. The company reported 74% y/y and 26% y/y expansion in Q4-18 and 2018FY CoGS respectively.
Management attributed the CoGs pressure in 2018 to energy supply challenges (as only 41% vs. target of 60%, of its energy requirements was supplied by BEDC1, with generator set supplying the balance) which (are not under its control and) have not been addressed.
Higher finance charges to cap pre-tax profits: With the one-year moratorium on the N1.95 billion concessionary loan from the Bank of Industry (BOI) ending last year, we expect interest payment to commence in 2019, potentially increasing finance charges by 83% y/y to N537 million, on our estimate.
Estimates and valuation: The net impact of our adjustment translates to growth in PBT and PAT of 5.2% y/y and 2.3% y/y respectively in 2019, and average EPS growth of 24.6% in 2020-2021E.
Our new TP of N93.6/s implies total upside of 21% after incorporating expected dividend yield of 4.0%.
OKOMUOIL currently trades at P/E and EV/EBITDA of 8.89x and 8.06x, significant discounts to its Middle East and Africa peer averages of 16.6x and 18.6x. We upgrade our recommendation to BUY, from HOLD.
By Adedapo Adesanya
Brent crude rose by 3.83 per cent or $3.04 to $82.29 per barrel on Thursday after an information that an Iranian parliament committee was reviewing a bill that would ban US and Israeli vessels from the Strait of Hormuz.
Also, the price of the US West Texas Intermediate (WTI) crude futures went up by 81 cents or 1.05 per cent to $77.29 per barrel during the session.
Under the apparent draft, Iran would ban American and Israeli ships from transiting the strait. Other nations that have harmed Iran would not be allowed to transit until compensation is paid, according to the draft. Iran would impose penalties on violators equivalent to 20 per cent of the value of cargo aboard a ship.
Market analysts noted that crude traders remain focused on the US-Iran agreements, and the longer the delays, the more prices will fade back to the upside.
Iran has warned Gulf states that any new US attack on its territory would trigger attacks on critical energy infrastructure across the region.
Before the Iran conflict began in late February, about one-fifth of global daily oil and liquefied natural gas supplies flowed through the Strait of Hormuz.
Meanwhile, Yemen’s Houthis said they carried out missile and drone attacks on “Saudi deployments” in Marib and Hadramout in Yemen on Thursday. This has led to elimination of Saudi-aligned fighters as well as destruction of military camps, weapons depots and vehicles.’
Also, Iran and Oman appear to be close to agreeing on joint management of the Strait of Hormuz with Iran’s foreign ministry spokesman, Esmaeil Baghaei, saying the deal with Oman was “in the final stages.”
Saudi Arabia has slightly lowered the official selling price for its flagship Arab Light crude oil to Asia in September.
Elsewhere, a major oil refinery in Russia’s Yaroslavl region was on fire after a big Ukrainian drone attack. The President of Ukraine Volodymyr Zelenskiy said the country’s military had hit two Russian oil refineries – the Bashneft-Novoil refinery in the republic of Bashkortostan, and the Slavneft-Yanos refinery in the Yaroslavl region.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange closed flat on Wednesday, August 5, as the market witnessed weaker trading activity with only two deals executed.
In the midweek session, the volume of securities exchanged by investors dropped 99.9 per cent to 802 units from the 1.6 million units recorded on Tuesday. The value of securities further decreased by 99.6 per cent to N208,240 from the preceding session’s N47.6 million, and the number of deals significantly went down by 93.9 per cent to two deals from the 33 deals recorded a day earlier.
Great Nigeria Insurance (GNI) Plc remained the most traded stock by value on a year-to-date basis, with 3.4 billion units worth N8.4 billion, followed by Infrastructure Credit Guarantee (Infracredit) Plc with 2.3 billion units sold for N6.5 billion, and Central Securities Clearing System (CSCS) Plc with 76.9 million units transacted for N5.5 billion.
GNI Plc was also the most active stock by volume on a year-to-date basis, with 3.4 billion units exchanged for N8.4 billion, followed by Infracredit Plc with 2.3 billion units traded for N6.5 billion, and Resourcery Plc with 1.1 billion units valued at N415.7 million.
There were no price gainers or losers yesterday.
As a result, the market capitalisation stood unmoving at N2.739 trillion, while the NASD Security Index (NSI) remained unchanged at 4,563.96 points.
By Adedapo Adesanya
The Naira slid against the US Dollar by N2.28 or 0.17 per cent in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Wednesday, August 5, to N1,363.85/$1 from N1,362.55/$1.
The local currency also declined against the Pound Sterling in the official market during the session by N5.97 to close at N1,837.38/£1 compared with Tuesday’s closing rate of N1,831.41/£1, and against the Euro, it crashed by N6.54 to quote at N1,575.25/€1 versus the preceding session’s N1,568.71/€1.
But at the black market, the Nigerian Naira traded flat against the greenback yesterday at N1,400/$1, and also remained unchanged at the GTBank FX desk at N1,373/$1.
The Central Bank of Nigeria (CBN) says rates have narrowed to below two per cent, while the country’s external reserves have risen above $52.5 billion, reflecting the impact of its ongoing monetary and foreign exchange reforms.
CBN Governor Yemi Cardoso, represented by the Acting Director of Corporate Communications and Investor Relations, Mrs Hakama Sidi-Ali, disclosed this on Tuesday during the CBN Fair in Gombe. He noted that reforms introduced since 2023 had significantly reduced the disparity between the official FX market and the parallel market.
“The Naira continues to strengthen, with the spread between official and Bureau de Change rates now below two per cent,” he said, adding that reserves at $52.5 billion were supported by sustained inflows and renewed investor confidence in the economy.
Interbank FX transactions slid as weaker market activities dropped total Dollar volume exchanged to $75.35 million, a 51.8 per cent decline from $156.23 million in turnover quoted at the previous close.
The deals at the NFEM window also fell as data from the central bank put Wednesday’s quote at 82 from 139.
In the cryptocurrency market, major were down as global risk sentiment softened as a key world equity index slipped and chipmakers fell.
The MSCI All Country World Index snapped a five-day run to fall 0.2 per cent as chipmakers retreated on both sides of the Pacific. South Korea’s Kospi, a bellwether for the AI trade, dropped 4.4 per cent.
Ripple (XRP) depleted by 1.7 per cent to $1.05, Binance Coin (BNB) decreased by 1.0 per cent to $594.87, Cardano (ADA) depreciated by 0.9 per cent to $0.1884, TRON (TRX) shrank by 0.2 per cent to $0.3261, Solana (SOL) crumbled by 0.1 per cent to $74.00, and Dogecoin (DOGE) went down by 0.1 per cent to $0.0697.
On the flip side, Ethereum (ETH) gained 2.3 per cent to trade at $1,911.41, and Bitcoin (BTC) rose by 0.8 per cent to $64,759.28, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) remained unchanged at $1.00 apiece.
