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.