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THE OKOMU OIL PALM COMPANY PLC 9M'19 Earnings - Rebounding CPO Prices Support Stronger Q3

9M’19 figures dragged by weak H1 even as third quarter impresses
The Okomu Oil Palm Company PLC released its 9M’19 earnings yesterday, with Q3’19 PAT rising 4% q/q and 22% y/y to ₦1.6 billion. The earnings growth was driven by a 61% q/q jump in topline to ₦7.0 billion in Q3, even as 9M’19 revenue still came in 7% smaller y/y due to the weaker topline in H1’19. As is typical of the third quarter, gross margin also improved significantly to 92% in Q3, boosted by the lower costs of the harvest season (Q2’19: 80%, Q3’18: 87%). Notably, this drove a 91% q/q jump in EBIT to ₦3.0 billion in Q3’19 (9M’19: ₦5.9 billion), in spite of an 80% q/q jump in operating expenses in the quarter. Finally, after adjusting for a net finance income of ₦0.2 billion and a tax expense of ₦1.7 billion, PAT came in at ₦1.6 billion in Q3, even as 9M’19 PAT came in 43% weaker y/y at ₦4.1 billion – again dragged by the weaker H1’19. Notably, in a surprise move, the board of directors proposed an interim dividend of ₦2.00 per share.

Border closure and rebounding prices hand Okomu lifeline?
While the first half of the year was highlighted by declining Crude Palm oil (CPO) prices amidst a global Oil palm glut and an increase in illegal palm oil supply to the country, we believe that supply pressure on CPO prices reduced in Q3, leading to higher prices and consequently higher revenues in the quarter. In the global space, a slowdown in production growth as well as rising demand for biodiesels (largely from Indonesia) saw average CPO prices jump 2% q/q in Q3. Furthermore, we believe that local prices were supported by the partial closure of the border, effectively reducing CPO supply in the country. Notably, amidst the rise in CPO prices, oil palm revenue jumped 65% q/q to ₦6.0 billion in Q3’19. With the borders largely expected to remain closed for the rest of 2019 and the outlook for global CPO prices remaining strong, we forecast a 1% reduction in average CPO prices in FY’19 to ₦392,851/tonne, dragged by weaker average prices in H1’19. Combined with strong global rubber prices, this takes FY’19 revenue 4% higher y/y to ₦21.1 billion.

BUY rating reaffirmed on stock
Whilst we project an increase in topline, we foresee a 20% y/y reduction in EBIT to ₦8.1 billion in FY’18, after accounting for higher operating expenses. After adjusting for interest and tax, we arrive at a ₦5.7 billion PAT for FY’19 and a 12-month TP of ₦67.55. We place a BUY rating on the stock.