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Okomu Oil Q4 2018 and Q1 2019 Results Review: Up Against Strong Headwinds in 2019

Stock & Analyst Updates	4011 VIEWS
Stock & Analyst Updates
4011 VIEWS

Thursday, May 09, 2019 / 01:06PM / FBNQuest Research

-21% cut to EPS forecasts over the 2019-20E period

Okomu Oil’s (Okomu) Q1 2019 earnings came in weaker than expected, down -71% y/y to N1.0bn. Compared with our forecast, earnings missed by around 50%. Following discussions with management, we expect the difficult business environment to persist over the next three quarters. In Q1, field operations slowed down considerably on days leading up to elections, which weighed on performance during the period.

While this event would not re-occur this year, the continued pressure on consumer wallets, a relatively high global crude palm oil (CPO) inventory due to India’s import tax increases and a flood of smuggled CPO and olein products into the local market continue to be of significant concern and weigh heavily on our revised earnings’ outlook for 2019E.

These factors forced local CPO prices downwards and limited unit volume growth in Q1. Okomu’s Q1 realised average CPO prices of N364,136 (US$1,011) per tonne declined -7% y/y while CPO unit volume sales were flattish y/y. Additionally, rubber sales remain under pressure due to persistent port issues which have constrained rubber exports.

Given these headwinds, we have cut our EPS forecasts over the 2019-20E period by -21%. We do not expect the local glut to ease during the peak season (H1), with the market possibly stabilising in Q4. Our new price target of N64.7 is down by around 18% and implies a potential downside of -7.5% from current levels.

Year-to-date, Okomu shares have shed around -8%, in line with the NSE ASI’s performance. We retain our Neutral rating on Okomu shares which are trading on a 2019E P/E multiple of 10.2x for an EPS growth of 37.2% in 2019E.

Q1 2019 PBT declined -68% y/y to N1.3bn

In Q1, all key line items on the P&L worsened on a y/y basis. While sales were down -43% y/y, PBT and PAT both fell by -68% y/y and -71% y/y respectively. Sales for oil palm and rubber declined by –45% y/y and -27% y/y to N3.5bn and N721m respectively. The more substantial y/y decline on the PBT line was driven by a gross margin contraction of c.-1000bps y/y to 80%.

This completely offset any benefits accruing from a double-digit y/y decline in operating expenses. Sequentially, PBT and PAT both worsened even though sales grew by 18% q/q. The trend was broadly similar in Q4 2018. Q4 sales of N3.6bn declined -2.8% y/y, while PBT and PAT both declined by -18% y/y and -63% y/y to N1.6bn and N1.3bn respectively. The topline decline, the third in a row, was primarily driven by lower rubber sales which fell by around -11% y/y to N879m.

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