Thursday, July 28, 2016 6:22pm/ Vetiva Research
· Solid topline growth on higher selling prices
· Strong improvement across margin lines
· Earnings run rate to hold steady in H2’16
· Valuation revised higher on improved earnings outlook
OKOMUOIL’s H1’16 earnings showed strong y/y and q/q growth across every line item. Turnover for the 6-month period increased 51% y/y to N7.5 billion (Oil palm sales up 66% to N6.8 billion, Rubber sales down 15% to N0.8 billion amidst c.12%y/y fall in international rubber prices) whilst PAT came in at N3.5 billion, almost doubling the N1.8 billion reported in H1’15.
We are not surprised by the sharp topline growth in the oil palm segment as we had earlier envisaged a sizeable shift in product pricing the Oil palm industry from FY’16. In our Oil Palm Industry report titled Time to extract trapped value, 6 June 2016, we highlighted that prices of local palm oil products were set to rise following the inclusion of “Palm Kernel/Palm Oil Products/Vegetable oils” in the list some 41 items that are no longer eligible for funding via the official foreign exchange window.
We believe higher domestic prices of oil palm again supported OKOMUOIL’s Q2 revenue (up 28% q/q), just as in Q1. Buoyed by the higher selling prices, all margin lines showed significant improvement – Gross margin at 91% (H1’15: 85%), EBIT margin at 53% (H1’15: 47%), PBT margin at 52% (H1’15: 43%) – amidst modest containment of OPEX over the period.
Bottom-line further benefitted from a 7% y/y reduction in Long Term Loans to N2.9 billion, with interest expense down 32% y/y to N243 million. We expect this to keep finance costs in check through FY’16.
FY’16 earnings outlook incites lower valuation
Amidst a slew of macro updates since our last report on OKOMUOIL, the naira has further weakened 6% to date at the parallel market (Currently: NGN378/USD). We believe this would further support local prices of the banned 41 items including oil palm products going into H2.
Also, the weaker official exchange rate following the adoption of flexible foreign exchange market means more naira value from the rubber exports. After updating our model to reflect the currency effect, we revise our FY’16 revenue to N15.0 billion (Previous: N13.4 billion, and PAT estimate to N4.9 billion (Previous: N3.6 billion). Our target price has also been revised to N46.28 (Previous: N42.11), supported by improved earnings outlook.
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6. OKOMUOIL CPO Offsetting Rubber Weakness Maintains Neutral Rating
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