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Initial View - The Okomu Oil Palm Plc FY 2018- Cost Pressure plunge earnings

• In our last update on Okomu in November (See report: ), we guided that cost pressure from planting season in Q4 18 and unresolved issues with Benin Electricity Distribution Company (BEDC) will pressure earnings over 2018. True to our words, results released by the company this afternoon showed decline in PAT by 7% YoY to N8.5 billion, which translates to EPS of N8.91 (which is largely in line with our estimate of N8.90). However, surprising was the steeper contraction in gross margin by 394bps YoY to 75.2% compared to our estimate of 78.5%. In line with the company usual practice, the board of directors declared dividend per share of N3.00 (FY 17: N3.00) which translates to a dividend yield of 4% based on current market price.
• Over Q4 2018, which is usually the lean season for palm oil producers, Okomu’s revenue contracted by 2.8% YoY to N3.6 billion which was largely driven by lower CPO and rubber sales over the period. For CPO, the contraction mainly mirrors declines observed in domestic CPO prices, which typically reflects the movement in global CPO prices. That said, over the review period, global CPO prices declined by 25% YoY in Q4 18. However, going by our estimates, we reckon that the higher matured area (+7.8% YoY) from its plantation which translates to higher harvest of Fresh fruit bunches, supported increased volumes over Q4. Similarly, given that Okomu exports all its rubber, the weak global rubber prices (-24% YoY) largely explains the moderation in rubber sales over the period.
• Further down, in addition to lower sales over the period, Okomu also faced cost pressures emanating from energy issues experienced by the Benin Distribution company (BEDC) over the period. Recall that Okomu tilted its energy mix towards sourcing bulk of its energy from the national grid (BEDC) rather than diesel. As a result, cost of goods sold was up 19% YoY to N5.02 billion. While the company was not so explicit with its cost breakdown, we would seek clarity from the management regarding cost pressures faced.
• However, operating expenses were tightly controlled over the period, rising only 0.02% YoY to N5.2 million in the quarter. Thus, following lower sales and higher cost of sales, EBIT margin contracted 520bps YoY to 42.4% (FY 17: 47.5%).
• Overall, while the company reaped the benefits of a deleveraged balance sheet which resulted in a net finance income of N85.7 million (vs N61.1 million in 2017), earnings still printed at N1.3 billion (-54.3% YoY), translating to EPS of N1.32.
• Okomu trades at a current P/E of 7.64x which is at a discount to MENA peer average of 13.5x and Presco of 9.2x. We have a FVE of N97.75 which translates to a STRONG BUY rating on the stock.