OKOMUOIL: CPO Offsetting Rubber Weakness; Maintains Neutral Rating


Thursday, April 14, 2016 9:50AM /FBNQuest Research

Another modest upward adjustment to our price target
Following Okomu Oil’s (Okomu) better-than-expected Q4 2015 results, we have increased our 2016-17E earnings forecasts by 7% on average and our price target by the same margin to N32.4. Our earnings upgrade is mainly driven by an 8% increase in our sales forecasts over the period. Year-to-date, Okomu shares have shed slightly under 1% (vs the ASI’s -14%).

The shares appear relatively inexpensive: they are trading on a 2016E P/E multiple of 10.7x (vs c.30x for the consumer goods names) for 5% y/y EPS growth on average over the 2016-18E period. From current levels, we see a potential upside of 8%. As such, we have retained our Neutral rating.

Palm oil, the driver of revenue growth in the near to medium term
Okomu specialises in palm oil and rubber production. In 2011, rubber accounted for about 40% of its revenue. However, due to unfavorable pricing, its contribution has been dwindling to reach as low as 20% in 2015. In the near term, we do not see any sign of significant recovery in rubber prices.

Okomu management has also hinted that rubber volumes are likely to be subdued this year. As such, we continue to expect topline growth to be driven by palm oil. Last year, Okomu cleared about 4,000 hectares (ha) of land for palm oil cultivation and we expect another 4,000ha to be prepared this year – the cost for which has been factored into our model.

We also believe the company is on track to meet its 3-year target of cultivating additional 12,000ha of palm trees. We see sales and PBT growing by 8% y/y and 6% y/y respectively in 2016E.

Q4 2015 PBT and PAT up materially y/y
Okomu’s Q4 2015 sales grew 13% y/y while PBT and PAT of N343m and N493m compare with Q4 2014 PBT and PAT of –N173m and –N167m respectively. Okomu reclassified some costs between cost of goods sold (cogs) and operating expenses (opex) making it difficult to comment meaningfully on the cost lines separately.

The PBT was helped by a -21% y/y decline in total costs (cogs+opex) which more than offset a –N73m net finance expense charge (vs. +N89m in Q4 2014). PAT came in higher than PBT due to a tax credit of N83m and other comprehensive income (OCI) of N66m.

Sequentially, sales and PBT declined -28% q/q and -18% q/q respectively. However, PAT advanced by 36% q/q, again owing to the tax credit and OCI gain.

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