EUR 4.00 For Business Accounts Only

Okomu Oil Palm Plc Q3 19 - Glimmer of hope

• Okomu Oil Palm Plc released Q3 19 result yesterday, with reported revenue debunking the historically lower level during the quarter due to the onset of the lean season. Accordingly, reported EPS is higher by 21.8% YoY to N1.66 (also compared to Q1 19: N1.06 and Q2 19: N1.60). Notwithstanding, the EPS came in much lower than our expectation as a result of higher effective tax rate and operating expense. For context, reported tax spend, translates to an effective tax rate of 52%, compared to seven quarter average of 22% and 27% in Q3 18. Irrespective of the strong performance in Q3, smuggling impact on EPS in Q1 and Q2 kept EPS for 9M 19 lower at N4.31, which is 43% lower compared to N7.59 in 9M 18. The company declared an interim dividend of N2.00, which translates to a dividend yield of 4% using today’s closing price.
• Sales turned a corner: Relative to prior quarters, the company witnessed increased demand for its products on the back of FG’s directive to close major borders in the country in a bid to curb illegal influx of goods into the country.  As a result, despite Q3 being a slow quarter due to the onset of the lean season, the company was able to draw down from its large pile of inventory, which translated to higher sales over the quarter (+86.3% YoY to N6.9 billion). Surprisingly, despite border closures, prices remained relatively flat at ~N300,000/ton as ongoing trade spat between US and China and India’s decision to raise tariff on CPO imports continue to bolster global market supplies, thereby leaving international prices depressed. The company also reported higher rubber sales (+71.4% YoY to N1 billion) which in our view is reflective of higher global rubber prices.
• Operating margin expansion despite cost pressures: Over Q3 19, the company reported slight expansion in raw material cost (+3.9% YoY to N523 million). In our view, the rise in raw material cost is reminiscent of higher fertilizer cost over the period. Regardless, following faster rise in sales relative to raw material cost, gross margin expanded 600bps YoY to 92.5%. Looking at the numbers more closely, we do not rule out an adjustment to the raw material cost over Q4. Elsewhere, operating cost more than doubled to N3.4 billion, with OPEX to sales increasing to 49.2% from 39% in prior period. We believe this is related the higher operating cost on the ongoing construction work at the extension 2 plantation. Accordingly, EBIT margin contracted 420bps YoY to 43.3% in Q3 19.
• Rolling forward our model and taking into cognizance adjustments made to our model, we maintain our BUY recommendation on OKOMU and raise our FVE by 2% to N77.23. This solely reflects the positive change in market dynamics following the extension of the partial closure to the country’s borders which bodes well for sales and capacity expansion in 2020 and 2021. Okomu trades at a P/E of 9.74x at a discount to Presco and Bloomberg MENA peers of 11.45x and 9.79x respectively.