OKOMUOIL's Operating Expenses Grow by 17% in Q1'16 Results


Thursday, April 28, 2016 6:28PM/ FBNQuest Research

Event: Okomu Oil reports Q1 2016 results

Implications: Upward revisions to consensus estimates likely

Positives: PBT and PAT advanced 38% y/y and 55% y/y respectively

Negatives: Operating expenses grew 17% y/y

This afternoon, Okomu Oil (Okomu) reported Q1 2016 results which 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 operating expenses growing 17% y/y, PBT grew by a similar margin to sales due to a -49% y/y decline in net finance charges. However, PAT grew by a wider margin due to a lower tax rate of 2.4% vs. 12.8% in Q1 2015. On a sequential basis, 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.

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 our last review note, we mentioned that we do not see any sign of significant recovery in rubber prices (and rubber sales) in the near term. To confirm our views, Q1 2016 sales were mainly boosted by palm oil sales which grew 51% y/y. Rubber sales on the other hand declined by 21% y/y. We believe the strong growth in palm oil sales was mainly as a result of the company’s ongoing expansion plans. We seek management’s confirmation on this.

Compared with our estimates, sales were ahead by 41% while PBT and PAT came in much stronger. The main reason for the wide PBT variance was the stronger-than-expected sales growth given that total costs (cost of goods sold + operating expenses) were in line with our forecasts.

On an annualised basis, Q1 sales and PBT are tracking ahead of consensus estimates of N10.6bn and N3.0bn respectively. As such, we expect consensus to revise their estimates upwards cautiously.

Year-to-date, Okomu shares have shed -4.3%, outperforming the NSE ASI which has declined -12.8%. On our published estimates, Okomu shares are trading on a 2016E P/E of 10.4x (vs c.30x for the consumer goods names) for average EPS growth of 4.6% y/y over in 2017-18E.

We rate the stock Neutral. Our estimates are under review.

Okomu Oil’s Q1 2016 results: actual vs. FBNQuest Research estimates (N millions)

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