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THE OKOMU OIL PALM COMPANY PLC H1'20 Earnings Release - Supply correction continues to drive earnings

Supply correction continues to drive earnings                                                      

The Okomu Oil Palm Company PLC (OKOMUOIL) recently released its H1’20 result, reporting a 58% y/y jump in Net profit to ₦4.0 billion, 6% ahead of our ₦3.8 billion estimate. The earnings beat was driven by a stronger-than-expected topline as well as lower tax expense. At this time last year, Okomu’s topline had tumbled 34% y/y due to weak domestic CPO prices, amid a smuggling-induced oversupply in the Nigerian market. We estimate that average CPO prices fell c.14% y/y, with an outsized impact in H1’19. That said, with the FG closing the land borders in H2’19 to reduce the impact of smuggling, we believe that average CPO prices have rebounded, even as demand for smuggled CPO has shifted to domestic producers. We estimate that constrained mobility due to the pandemic has also kept smuggling suppressed, so far in FY’20.  Consequently, the company reported a 68% y/y growth in Oil palm sales to ₦6.1 billion in Q2’20, taking H1’20 Oil palm sales 75% higher y/y to ₦12.4 billion. On the other hand, declining rubber prices in the global sphere as well as a pandemic-induced moderation in demand dragged Rubber sales 35% lower y/y to ₦0.5 billion in Q2’20, taking H1’20 Rubber sales 25% y/y lower to ₦1.1 billion. That said, supported by strong oil palm sales, Okomu reported a 51% y/y jump in topline to ₦6.5 billion in Q2’20, taking H1’20 Revenue 58% higher y/y to ₦13.5 billion (Vetiva: ₦12.2 billion). Looking forward, we expect the borders to remain closed for most of the year and foresee prices staying higher-for-longer. Thus, we forecast a 36% y/y jump in FY’20 Revenue to ₦25.7 billion, driven largely by Oil palm revenues (up 35% y/y to a ₦23.2 billion forecast).                                                   

Interestingly, in spite of rising inflation due to the pandemic and the currency adjustment, the firm’s gross margin improved by 7ppts to 87% in Q2’20, translating to a 64% y/y expansion in gross profit to ₦5.7 billion (Vetiva: ₦3.9 billion). On the other hand, Okomu recorded a significant 64% y/y jump in operating expenses, reflecting increased inflationary pressures in the period. EBITDA printed at ₦3.2 billion in Q2’20 (Q2’19: ₦2.0 billion, Vetiva: ₦3.2 billion), taking H1’20 EBITDA 87% higher y/y to ₦6.9 billion (Vetiva: ₦6.9 billion). Following a 154% y/y increase in borrowings to fund a planned expansion, net finance costs grew five times y/y to ₦0.1 billion (Vetiva: ₦0.1 billion) in Q2’20. Finally, after adjusting for a Q2’20 tax of ₦0.5 billion, the oil palm producer reported a 30% y/y rise in PAT to ₦2.0 billion in Q2’20 (Vetiva: ₦1.8 billion).