OKOMUOIL: Near term positive outlook; Maintains Neutral Rating


Thursday, May 5, 2016 9:57AM/FBNQuest Research

Another upward adjustment to our price target
Okomu Oil’s (Okomu) Q1 2016 results came in much better than we expected. Compared with our estimates, sales were ahead by 41% while PBT came in much stronger. Okomu grew production by mid single digits y/y based on our checks; this implies that the strong sales growth in Q1 (+37% y/y) was due to favorable pricing during the period.

Following the positive surprise, we have raised our earnings forecasts over the 2016-17E period by 38% on average and our price target by 18% to N38.40. We highlight that we have been cautious in the upward revision to our earnings estimates because we have some reservations as to the sustainability of the favorable pricing beyond the near term.

Year to date, Okomu shares have shed -3.9%, outperforming the broad index which has shed -10.3%. The shares are inexpensive - they are trading on 2016E P/E of 7.3x (vs c.30x for the consumer goods names) for average EPS growth of 12.3% over the 2016-18E period.  From current levels, we see upside potential of 32% to our price target. That said, we are retaining our neutral rating on the stock because of our cautious view on pricing.

Q1 2016 PBT and PAT up markedly y/y
Okomu’s Q1 2016 results showed that sales of N3.33bn grew 37% y/y while PBT and PAT of N1.64bn and N1.60bn were both up 38% y/y and 55% y/y respectively. Despite gross margins contracting by -802bps y/y to 84% and opex growing 17% y/y, the impact of the sales growth was significant, leading to PBT growth of 38%

y/y. PAT grew by a wider margin due to a lower tax rate of 2.4% vs. 12.8% in Q1 2015. Sequentially, sales grew 67% q/q, while PBT and PAT grew by 376% q/q and 274% q/q respectively. The q/q PAT growth was weaker than that of PBT due to a tax credit of N83m Okomu recorded in Q4 2015.

Positive near term outlook
The main reason for the wide PBT variance vs our estimate was the stronger-than-expected sales growth given that total costs (cogs + opex) were in line with our forecasts. As such, we have raised our sales forecast by 10% on average over the next two years.

We expect sales growth to be driven in part by volume growth (we are being cautious on our pricing outlook) because of the company’s ongoing expansion and replanting exercises. We see sales and PBT growing by 18% y/y and 40% y/y respectively in 2016E.

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