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Initial View - The Okomu Oil Palm Plc - Worrisome start to the year

• The Okomu Oil Palm Plc released its first quarter 2019 result on Friday which showed significant contraction in PAT by 71% YoY to N1 billion, translating to an EPS of N1.06. The depressed performance emanated from material decline in revenue and higher production cost. The poor Q1 19 numbers marks the weakest first quarter performance since 2014, as the first two quarters of its financial year which coincides with its harvest season usually post the best performance.
• Lower domestic CPO prices dent revenue. While we had expected volume contraction to stem from the high base in the prior year (due to bumper harvest occasioned by favourable weather condition), the depressed global CPO rubber prices, the steep contraction of 42.5% YoY far exceeded our expectation. For context, when compared to Q1 2017, revenue is still much weaker (-28% YoY).
• On prices, global CPO prices were down 19% YoY over the period on the back of the ongoing glut in the global CPO market. Given that local prices are reflective of global prices, local CPO prices have remained depressed. Beyond movement in the global market, we believe the smuggling of cheaper CPO into the domestic market, which are of similar quality for some class of corporates further escalated the pressure on revenue.
• Higher cost of sales dent margins. Despite weaker volumes over the period, cost of sales rose 27.9% YoY to N838 million, with gross margin contracting to 80.1% from 91.1% in the prior year. While we link this to higher fertilizer cost from CBN’s ban on importation of fertilizer, we will seek further clarity from management. Reflecting the weak performance from the topline, Okomu’s OPEX to sales ratio expanded to 48.7% from 36.4% in the prior year, although actual operational spend came in 23% lower YoY to N2.1 billion. As a result, EBIT margin compressed to 31.4% from 54.7% in the prior year.
• Elsewhere, having fully paid down its FCY loan from its parent company in Q1 18, Okomu enjoyed the benefit of a deleverage balance sheet as finance expense dipped 40.7% YoY to N75.9 billion. Overall, PAT and PBT declined 68% and 71% respectively to N1.3 billion and N1billion respectively.
• Okomu trades at a current P/E of 7.9x which is at a discount to MENA peer average of 12.94x and Presco of 9.2x. We have a FVE of N97.75 which translates to a BUY rating on the stock.

More analysis to follow.