Thursday, May 04, 2017 12:58 PM /FBNQuest Research
Upward revisions to our estimates and price target Okomu Oil’s (Okomu) Q1 2017 results came in stronger than we expected mainly because of a positive surprise on the topline.
We attribute the strong sales growth to both volume and pricing. We also believe the company is on track to meeting its full year guidance of around 46,000te for palm oil production.
The production estimate implies volume growth of around 25% y/y. On the back of the stronger-than-expected earnings and the company’s guidance, we have increased our earnings estimates for the 2017-18E period by 22% on average.
Despite the increase to our estimates, we have left our price target unchanged at N57.0, mainly because of our decision to increase our risk free rate assumption by 100bps to 15.5%.
Okomu shares are trading on a 2017E P/E of 5.7x for EPS growth of 7.3% y/y in 2018E. From current levels, the shares show an upside potential of 21%.
Despite the healthy upside, we are retaining our Neutral rating on the stock.
Q1 2017 PBT and PAT up markedly y/y
Okomu’s Q1 2017 results showed that sales grew by 77% y/y to N5.9bn. PBT grew by 108% y/y to N3.4bn while PAT of N3.1bn advanced by 92% y/y.
Although gross margin contracted by -551bps y/y to 78.6% and operating expenses increased by 11% y/y, these negatives were more than offset by the strong sales growth, and to a lesser extent, a 94% y/y decline in net finance costs, leading to the strong bottom line.
PAT growth was softer due to an effective tax rate of 9.6% compared with 2.4% in the corresponding quarter of 2016.
On a sequential basis, sales were up 71% q/q. PBT and PAT grew by wider margins of around 320% q/q on average.
Okomu’s palm oil business recorded sales growth of 74% y/y. The rubber business grew by 112% y/y during the quarter, but still accounts for less than 20% of the company’s topline.
As such, the palm oil business remains the driver of growth. The company has been benefiting from the CBN’s policy, which restricted palm oil importers from accessing the official fx window, through favorable pricing.
However, we have chosen to be cautious in our outlook on the topline mainly because of the CBN’s intervention in the fx market has resulted in a noticeable appreciation of the naira on the parallel market (this is favourable for competition/importers) coinciding with an uptick in inventory levels.
For FY 2017, we see sales and PBT growth of 43% y/y 77% y/y respectively.