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OKOMU OIL PALM PLC - Earnings remain strong despite seasonal slowdown

• Similar to recent earnings from listed peer, OKOMUOIL’s 9M’16 results came in strong with PBT up 100% y/y to ₦5.1 billion, 6% ahead of our estimate. As expected, Q3 revenue from the Oil Palm segment came off the Q2 record numbers (down 29% q/q to N2.7 billion) as seasonal effect weighed on volume; H2 is traditionally an off-peak period for Crude Palm Oil (CPO) production. When compared to the corresponding period of 2015 however (for better comparison), the 3-month Oil Palm revenue was up 27% y/y on the back of strong local CPO prices. Q3 revenue from the Rubber segment (export) also increased 5% y/y to ₦653 million largely supported by weaker naira which offset the impact of lower rubber prices. OKOMUOIL’s overall 9M revenue rose 41% y/y to N10.9 billion, slightly below our ₦11.4 billion estimate.
• Given that palm oil remains on the list of 41-items excluded from accessing official FX market, the outlook for oil palm pricing remains positive and key in driving OKOMUOIL’s earnings in coming quarters. On the rubber front, we highlight that international natural rubber prices have increased by 27% from August low amidst a couple of factors - strengthening car sales in China (largest consumer of rubber), concern on output from Thailand and an uptrend in price of synthetic rubber (substitute to natural rubber). Coupled with exchange rate impact, we expect further margin improvement from the OKOMUOIL’s rubber segment.
• Notwithstanding the more positive outlook on the rubber segment in Q4, we cut our FY’16 revenue forecast to ₦14.6 billion (Previous: ₦15.1 billion) as we further factor in the off-peak period effect of the oil palm sector in our model. Also, we take a cautious stance on Q4 earnings as we make provision for higher quarter’s cost of sales (as a % of sales) in line with the spike observed in Q4’15 (111% of sales) amidst recognition of development costs in Extension 2. We note that more work has been done on the Extension 2 in 2016, however, 9M’16 cost of sales (as a % of sales) remains modest at 12% (9M’15: 16%). Be that as it may, FY’16 earnings will come in as record high, even as 9M earnings have already surpassed FY’15 level. We maintain our FY’16 PAT at ₦4.9 billion. Our target price has however been revised slightly higher to ₦48.81 (Previous: ₦45.18), supported by our improved post-2016 earnings outlook.