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Okomu Oil Palm Company Plc - Green Shoots or a False Spring?

Green Shoots or a False Spring?

• Upside Abounds. Shares of Okomu has returned +26% YTD, reflecting a remarkable 1^st quarter 2018 performance wherein the company reported EPS of N64 (+13% YoY) on the back of margin expansion and lower debt profile. Going forward, the repeated concern in the mind of investors is if there is still room for upside on the stock. Following revision to our estimates, we arrive at a FVE of N102.33 which implies a 20.4% upside from current pricing.
• Strong volumes growth to mask lower CPO prices. Domestic CPO prices have faced a downtrend in line with global CPO prices, with prospect of widening CPO surplus (USDA forecasting a +51% jump in global surplus to 4.9 million MT) dragging global CPO prices with pass through effect on domestic CPO prices (-27% YoY to N91,969.44/MT). However, having recorded strong volumes growth in Q1 18 (+73% YoY to 16,091MT)—owing to better than expected harvest, we see scope for higher volumes over 2018 which would provide succor to FY 18 revenue.
• Improved energy mix will support margin expansion. In a bid to preserve margins, management guided to measures to keep costs lower over 2018. Specifically, the company mentioned that its plant is now connected to the national grid with Benin Electricity Disco Company (BEDC) accounting for 60% of its total power usage (previously 40%) while also guiding to plans to increase the usage to 70% over 2018 to keep energy costs lower. We believe the company’s improved energy efficiency reflected in Q1 18 as Cost of Goods Sold (COGS) dipped 48.2% YoY to N655 million.
• Lower operating cost on the cards: In the first quarter of 2018, operating expenses increased by a whopping +116.1% YoY to N7 billion (Q1 18: OPEX to sales ratio: +15.49ppts YoY to 36.4%) which management linked to carryover expenses from prior quarter. In subsequent quarters, we expect a normalization in OPEX hence, we model an 11% YoY expansion in FY 18 OPEX which translates to a flat growth in OPEX to sales ratio of 25%. Thus, we forecast a 12% YoY jump in operating profits to N12.5 billion, which translates a 30bps jump in EBIT margin to 58%. 
• Lower finance costs bolster earnings: In Q1 18, Okomu scaled down its borrowing (Q1 18: N1 billion vs N1.3 billion in FY 17) following payment of its FCY loan (€10 million) owed to its parent company—SOCFINAF S.A. As a result, net finance charges dipped to N36.7 million vs N105.9 million in Q1 18. In our view, this provides leeway for lower finance expense over FY 18. Irrespective, given ongoing expansion plans, we expect a slight increase in gross debt to N1.5 billion (+20% YoY).
• On balance, we now look for FY 18E PAT of  N1 billion (+11% YoY) with most of the gains expected to come from stronger volumes, greater cost efficiency and lower finance expense as opposed to the price-led gains of 2017. We have a FVE of N102.33 (Previous: N67.3) which implies a 20.4% upside from current pricing. Hence, we reiterate our BUY rating on the stock. Okomu trades at a forward P/E of 8.0x relative to 13.7x for Bloomberg MENA peers.

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