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Okomu Oil Records Weaker-Than-Expected Topline and Margins in Q3 2017

Proshare

Tuesday, October 31, 2017 1:25PM / FBNQuest Research 

Event: Okomu Oil reports Q3 2017 results

Implications: Modest revisions to consensus estimates likely

Positives: Limited to net finance cost improving from –N102m in Q3 2016 to a positive income of N65m

Negatives: Weaker-than-expected topline and margins 

Late yesterday, Okomu Oil (Okomu) reported its Q3 2017 results which showed that sales and PBT grew by 22% y/y and 14% y/y to N4.1bn and N1.4bn respectively. However, PAT declined by -73% y/y due to a 3,672bp y/y expansion in tax rate. Despite a net interest income of N65m (versus a charge of –N102m in Q3 2016), PBT growth was slower than the sales growth because of a -1,093bp y/y contraction in gross margin and an 11% y/y rise in operating expense. 

On a sequential basis, sales declined by -38% q/q. We attribute the sales decline to seasonality. The end-Sep quarter is usually one of the weaker quarters for the palm oil companies. Despite the positive net interest expense figure and a 20% q/q decline in operating expenses, these were not strong enough to offset the sales decline and a -2,863bp q/q contraction in gross margin, leading to PBT declining by -69% q/q. PAT declined by a wider margin of -95% q/q due to a higher tax rate of 88% compared with 28% recorded in the preceding quarter. Compared with our estimates, sales and PBT were behind by 18% and 30% respectively while PAT missed by a wider margin. 

On a 9M basis, sales of N16.6bn grew by 52% y/y. PBT and PAT grew by 80% y/y and 53% y/y to N9.2bn and N6.4bn respectively. Although gross margin contracted by -342bps y/y and operating expenses grew by 13% y/y, these were not strong enough to offset the strong sales growth and a -76% y/y decline in net finance costs, leading to the relatively stronger PBT growth. 

A breakdown of the revenue figure shows that palm oil sales of N3.2bn grew by 17% y/y while rubber sales advanced by 42% y/y to N929m. The rubber business now represents 23% of Okomu’s topline compared with 40% in 2011. We continue to believe that local palm oil producers are in an advantageous position relative to importers (competitors) due to CBN policies which have encouraged local production and also translated to favorable pricing. 

On an annualised basis, Okomu’s sales and PBT are broadly on track to meeting consensus’ FY estimates of N20.8bn and N11.3bn respectively, but PAT is tracking behind by 13%. 

Year to date, Okomu shares have gained 62% vs the NSE ASI which has returned 36% this year. We rate the stock Neutral. Our estimates are under review. 

Okomu Oil’s Q3 2017 results: actual vs. FBNQuest Research estimates (N millions) 
Proshare Nigeria Pvt. Ltd.
Source: NSE, FBNQuest Research estimates

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