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OKOMU OIL PALM COMPANY PLC - FY’16 earnings surge on strong product pricing

OKOMUOIL reported strong FY’16 results with all profit lines coming in at record high. PAT rose 87% y/y to ₦4.9 billion (Vetiva: ₦5.0 billion) despite a sizeable FX loss of ₦1.0 billion (FY’15: ₦29 million), translating to an EPS of ₦5.15. The strong earnings performance was mainly buoyed by the Oil Palm business segment which continues to benefit from favorable government policies, particularly the inclusion of Palm oil related products on the list of 41-items not eligible for official FX funding. Following this policy, local Crude Palm Oil (CPO) prices were strong over the course of the year, up 55% y/y according to the management. We note that the naira depreciated over 65% in the parallel market in 2016, allowing local CPO producers to increase prices. Amidst heightened inflationary pressure, margins improved modestly following moderation in OPEX to Sales ratio (FY’16: 27% vs. FY’15: 34%). On the back of the decent earnings, the Board of Directors proposed a final dividend of ₦1.50/share (FY’15: ₦0.10), beating both Vetiva (₦1.00) and Consensus (₦0.20) estimates.Notwithstanding our downward revision to revenue from the Oil palm segment, our FY’17 revenue is unchanged at N16.3 billion, supported by our increased optimism around rubber exports. Also, guided by management’s view of tougher cost management outlook for the year, we estimate FY’17 OPEX to Sales ratio at 32% (FY’17: 27%). Whilst our FY’17 earnings forecasts are relatively unchanged, our post-2017 earnings estimates have been revised slightly lower (FY’21 EBIT 5-year CAGR: 5% vs Previous: 8%) amidst revisions to local CPO prices assumptions. Nonetheless, our target price is revised higher to ₦54.05 (Previous: ₦49.60) after incorporating FY’22 (where most of recent investment should start materializing) into our valuation.​