Wednesday, March 22, 2017 08.39PM / ARM Research
CPO price increase to drive strong 2016 sales close:
2016 has been a spectacular year for Okomu, with 9M 16 EPS already surpassing that of FY 15. The improved operating performance largely stemmed from higher CPO prices which drove overall revenue growth (+41% YoY), despite a 7% YoY cutback in rubber sales reflecting softer global prices and lower production. Over the last quarter of 2016, management noted a recovery in rubber prices and subsisting momentum in CPO prices. Consequently, we look for topline growth of 112% YoY as guiding to a strong Q4 16 and by extension FY 16E revenues of N15.1billion (+55% YoY).
Lower finance costs to mask higher OPEX over Q4 16:
Following the scale down in foreign debt and increased drawdown of CBN single digit financing, Okomu reported 27% YoY cutback in net finance charges over 9M 16 to N228million. In our view, this pattern should continue over Q4 16 and should help mask impact of higher cultivation activities on cost lines (COGS and OPEX) over the last quarter. Particularly, management noted that labour constitutes the biggest chunk of cost, with the wage bill over 2016 negotiated only 5% higher despite inflationary pressures.
Mounting capex outlay to keep a lid on dividend pay-out:
On balance, we think the higher pricing and benign finance costs should drive Q4 earnings 51% higher YoY, raising 2016E EPS to N5.05 (+83% YoY). That said, while Okomu’s record profit raises prospects of a return to bumper pay-out as in 2011-12, management guides towards using retained earnings to finance expansion plans which hints at a likely cut in pay-out ratio from trend mean levels (six-year average: 42%). Consequently, assuming a pay-out ratio of 35% (FY 15: 4%), we project FY 16E DPS at N1.77 which implies dividend yield of 3.7% on current pricing.
The subsisting FX ban on imported CPO at the interbank market leaves importers subjected to the vagaries at the parallel market. Hence in a situation where naira weaken further or global CPO prices resume a bullish trend, importers could be further deterred with cutback in domestic supply driving CPO prices higher. In addition to a potential currency weakness, bullish trend in global prices could see rubber turnover significantly higher than 2016 irrespective of the continued decline in production.
Largely reflecting upswing in CPO prices, we revise our FVE for Okomu to N67.37 (vs. N49.78 previously), which implies a 40% upside from current pricing. Okomu trades at a current P/E of 9.95x (2016E: 9.50x) relative to 10.1x for Bloomberg African peers. We upgrade our rating on the stock to BUY (vs. NEUTRAL in previous communication).
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