Economy
Okomu Oil: Great Finish to Epic Year
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.
Source: www.armsecurities.com.ng.
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By Adedapo Adesanya
The last trading session of the week at the Nigerian Autonomous Foreign Exchange Market (NAFEX) ended on a negative note for the Naira on Friday, May 15, as it lost N15 Kobo or 0.1 per cent against the Dollar to trade at N1,371.04/$1 compared with the previous day’s N1,370.89/$1.
However, it further appreciated against the Pound Sterling in the same market segment yesterday by N20.77 to close at N1,830.61/£1 versus Thursday’s value of N1,851.38/£1, and gained N7.91 against the Euro to settle at N1,595.07/€1 versus N1,602.98/€1.
At the GTBank FX desk, the Naira lost N2 against the US Dollar during the session to sell at N1,383/$1 compared with the preceding session’s N1,381/$1, and at the black market, it remained unchanged at N1,385/$1.
The Naira is forecast to be broadly stable, supported by Dollar sales by the Central Bank of Nigeria (CBN) amid steady, higher oil receipts, with the market settling into a balance.
Policy direction is also expected to give the market some boost as the CBN said the new edition of the FX market guidelines will deepen liquidity, improve transparency and strengthen confidence in the country’s foreign exchange market.
According to the Governor of the CBN, Mr Yemi Cardoso, the update is due to changing global economic realities, domestic reforms and the need for a more coherent and forward-looking regulatory framework. According to him, the last edition of the FX manual was issued in 2018, making the latest review both timely and necessary.
Meanwhile, the cryptocurrency market plunged into the red zone as rising bond yields hit risk assets across markets, while traders are increasingly betting the Federal Reserve may need to raise rates again. Rising energy prices and resurging inflation could force central banks back into tightening mode.
Cardano (ADA) shrank by 4.4 per cent to $0.2557, Dogecoin (DOGE) slid by 3.7 per cent to $0.1104, Ripple (XRP) depreciated by 3.5 per cent to $1.41, Solana (SOL) crashed by 3.5 per cent to $87.81, and Binance Coin (BNB) slumped by 3.4 per cent to $659.64.
Further, Bitcoin (BTC) declined by 2.6 per cent to $78,547.49, Ethereum (ETH) lost 2.1 per cent to quote at $2,209.19, and TRON (TRX) tumbled by 0.7 per cent to $0.3509, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) traded flat at $1.00 each.
By Adedapo Adesanya
Oil prices gained more than 3 per cent on Friday, after comments by US President Donald Trump and Iran’s foreign minister further dented hopes of a deal.
Brent crude settled at $109.26 a barrel after chalking up $3.54 or 3.35 per cent, and the US West Texas Intermediate (WTI) finished at $105.42 a barrel, up $4.25 or 4.2 per cent. Over the week, Brent has climbed 7.84 per cent and WTI 10.48 per cent on uncertainty over the shaky ceasefire in the Iran war.
President Trump said he was running out of patience with Iran and has agreed with Chinese President Xi Jinping that the Middle East nation cannot be allowed to have a nuclear weapon and must reopen the Strait of Hormuz, which is the waterway where about a fifth of the world’s oil and liquefied natural gas normally passes.
On his part, Iran’s Foreign Minister Abbas Araqchi said on Friday that it does not trust the US and is interested in negotiating only if the US is serious, adding that Iran is prepared to go back to fighting but also prepared for diplomatic solutions.
On the US-China front, while the Chinese President did not directly make a comment on Iran, a statement from the foreign ministry spoke out against the conflict.
Among the deals the market was looking for from the US-China summit, President Trump said China wants to buy oil from the US, also saying he could lift sanctions on Chinese companies that buy Iranian oil.
Iran’s Revolutionary Guards said 30 vessels had crossed the strait between Wednesday evening and Thursday, far from 140 a day that was typical before the war. Two of the 30 vessels that reportedly cleared the Strait of Hormuz earlier this week were tankers, one en route to Japan and the other headed to China.
A prolonged closure of the Strait of Hormuz points toward tighter physical markets, potential refined product shortages, and upward pressure on prices in the coming weeks and months.
Even though the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) announced production increases in recent weeks, traders saw little immediate benefit because many barrels still cannot move efficiently through the Gulf region.
By Adedapo Adesanya
Nigeria received its first credit rating upgrade since 2012 from S&P Global Ratings, driven by improved oil market conditions and the country’s growing ability to refine and export crude locally.
The credit ratings agency upgraded the country’s rating by one notch to B, five levels below investment grade, according to a statement on Friday.
It raised its long-term foreign and local currency sovereign credit ratings on Nigeria to ‘B’ from ‘B-‘ and affirmed its ‘B’ short-term ratings. It also raised its long- and short-term Nigeria national scale ratings on the sovereign to ‘ngA+/ngA-1’ from ‘ngBBB+/ngA-2’.
S&P also cited Nigeria’s decision to liberalise the exchange rate as crucial to the development, and changed the outlook to stable.
The decision also comes as the federal government ruled out the reintroduction of subsidies on refined petroleum products, in order to avoid a return to larger budgetary deficits and drains on foreign currency (FX) liquidity.
S&P projected the general government deficit will widen to over 4 per cent of GDP on average during 2026 and 2027, a year of a general election.
It added that the implementation of reforms to broaden the tax base from very narrow levels is underpinning a steady decline in Nigeria’s debt-to-revenue ratio to 338 per cent in 2026 versus 500 per cent in 2023.
The agency said it could raise ratings over the next two years if fiscal outcomes improve significantly, either due to fiscal consolidation or structurally higher revenue, resulting in lower debt service costs.
It, however, warned that it could also lower the ratings if the implementation of Nigeria’s reform programme, particularly the series of critical steps taken to liberalise the exchange rate in 2023, reverses.
On the oil production forecast, S&P expects 2026 production to average approximately 1.66 million barrels per day, including condensates.
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