Friday, November 18, 2016 9:18 AM /FBNQuest Research
Upward revisions to estimates and price target
Okomu Oil’s (Okomu) Q3 2016 results came in stronger than we expected. The variance versus our estimates was due to sales and total costs (cogs+opex) surprising positively.
We have tried to reflect the surprises in our forecasts. As such, we increased our earnings estimates by 23.5% on average over the 2016-17E period. Consequently, we also increased our price target by 16% to N44.7.
Okomu shares have gained 40.2% this year and have significantly outperformed the broad index which has shed -10.6%.
The shares are trading on 2016E P/E of 9.4x (vs an average of c.30x for the consumer goods names under our coverage) for average EPS growth of 8.1% y/y over the 2016-18E period.
From current levels, the shares show a modest upside potential of 5.3%. We are retaining our neutral rating on the stock.
Strong fundamentals; palm oil in the front seat
Okomu’s Q3 numbers were boosted by its palm oil business which recorded sales growth of 27% y/y versus 5% y/y growth for the rubber segment. We believe the strong sales growth was driven more by pricing than volumes.
The higher prices are a reflection of lower supply arising from the CBN’s restriction of foreign exchange to palm oil importers (Okomu is a domestic producer).
In addition, due to the depreciation of the currency, imports have become more expensive. We still find the company’s fundamentals strong.
The government continues to try to shift attention away from oil and to non-oil of which the agriculture sector is expected to be a major beneficiary as well as a driver of economic growth. For FY 2016E, we see sales growing by 35% y/y and expect PBT to double y/y to N5.8bn.
Q3 2016 PBT and PAT up markedly y/y
Okomu’s Q3 2016 results showed sales growth of 22% y/y to N3.4bn. PBT and PAT advanced by wider margins of 188% y/y and 60% y/y to N1.2bn and N581m respectively. The strong sales growth was mainly responsible for the growth in earnings.
A -16% y/y decline in operating expenses also helped. Gross margin and net finance costs were flattish during the quarter. Sequentially, sales were down by -20% q/q which we attribute to seasonality.
Q2 is usually Okomu’s strongest quarter. PBT and PAT fell by 48% q/q and 71% q/q respectively, owing to a 10% increase in total costs (cogs + opex) and a 39% q/q increase in net finance costs.