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Okomu Oil Q1 2018 Results Review: Neutral Rating Maintained

Proshare

Wednesday, May 02, 2018 /09:55AM/FBNQuest Research 

Modest upward revisions to estimates and price target

Okomu Oil’s (Okomu) Q1 2018 earnings were broadly in line with our estimates. Consequently, we have increased our earnings forecast over the 2018-19E period by 3% on average. Despite the modest revisions to our earnings forecasts, our new price target is up by 8% to N91.5 mainly because we have reduced the risk free rate driving our DCF valuation by 100bps to 13% to reflect the lower yields on FGN bonds and increased our terminal EBIT margin by 400bps to 35%. 

The positive impact from these changes to our price target is moderated by an increase in our beta to 0.7 from 0.5. This year, Okomu shares have returned 14.5% and have outperformed the broad index by 6.6%. The shares are trading on a 2018E P/E of 7.5x for 12.5% y/y EPS growth in 2019E. From current levels, the shares show an upside potential of 18% to our N91.5 price target. We are retaining our Neutral rating on the stock. 

Q1 2018 sales, PBT and PAT posted double-digit growth

Okomu’s Q1 2018 results showed that sales grew by 25% y/y to N7.3bn. However, PBT grew slower, by 17% y/y to N4.0bn. Although operating expenses grew by 116% y/y and weighed on earnings, it was not strong enough to completely offset the y/y sales growth and a 1,251bp y/y gross margin expansion to 91%. Owing to a 319bp y/y expansion in the tax rate to 12.7%, PAT advanced by 13% y/y to N3.5bn.  On a sequential basis, sales and PBT doubled q/q. We attribute the q/q sales growth to seasonality trends – Q1 is usually among the strongest quarters for the palm oil companies. 

Outlook

The palm oil segment remains the driver of growth for Okomu, accounting for 87% of sales in Q1. A breakdown of the revenue figure reveals that palm oil sales grew by 136% q/q and 24% y/y in Q1 versus flattish q/q and 27% y/y growth for the rubber business. We attribute the topline growth seen in the palm oil segment more to volume than pricing. Despite our positive view on the segment, we continue to believe that the company’s pricing power could be at risk in the near term because of the return of importers/smugglers of palm oil who were crowded out when FX was not readily accessible and rates were not favorable. For 2018E, we see sales and PBT growth of 22% y/y and 17% y/y respectively.

 Proshare Nigeria Pvt. Ltd.



Proshare Nigeria Pvt. Ltd.

 

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