Okomu Oil Q3 2020 Results Review: Fundamentals Strong Despite Near Term Softness

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Friday, November 06, 2020 /10:34 AM / By FBNQuest Research / Header Image Credit: Invest Advocate


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Palm oil sales declines y/y on seasonal trends 

Okomu Oil's (Okomu) Q3 2020 earnings fell -37% y/y to N922m. The drivers behind this were a sales decline of -27% y/y to N5.1bn and gross margin contraction of around -1,362bps y/y to 78.9%. Palm oil sales were down -29% y/y mainly due to base effects. For context, sales in the corresponding period of 2019 were boosted by the federal government's closure of national borders in 2019.  

 

As such, Q3 sales which were in line with our forecast reflect seasonal trends during the lean marketing season. According to management, palm oil prices are presently around N490,000/tonnes. The combined impact of the fx devaluation and border closures continue to place upward pressure on palm oil prices. Given this scenario, we have raised our sales forecast for 2020E by around 2%.  

 

Following our discussion with management, we have raised our opex forecast by around 8% to reflect additional expenses from the now maturing Extension II plantation. We expect these costs will more than offset a moderation of other operational costs across the business. Additionally, in our view, potential cost saving benefits from the installation of a 5MW turbine at the rubber factory will now be deferred beyond Q1 2021 due to covid-related interruptions.  

 

The commissioning of the production plant at the Extension II plantation will be around end-H1 2021. Overall, our earnings outlook over the 2020-21E period is down by 2%. Our price target of N74.4 is unchanged and implies a potential downside of -7.0% from current levels. As such, we retain our Neutral rating on the stock. Okomu shares are trading on a 2020E P/E multiple of 13.1x for EPS growth of c.49% over the next two years. 

  

Q2 2020 earnings boosted by strong sales and GM expansion 

Okomu's Q3 2020 earnings were weaker y/y and q/q. PAT of N992m declined by -37% y/y and -50% q/q respectively. The relatively weaker performance was driven by softer sales (down -27% y/y and -22% q/q to N5.1bn) and a -1,362bp y/y contraction in gross margin which more than offset a double-digit decline in operating expenses. For sales, a -29% y/y decline in palm oil sales to N4.2bn surprised negatively.  

 

Predictably, rubber sales fell -16% y/y to N866m in Q3. Compared with our estimates, while sales were ahead of our forecast by 3%, PBT missed by around 33%. The variance was primarily driven by the weaker-than-expected gross margin of 79% vs. our 88% estimate. 


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