Okomu Oil Palm Plc: Optimistic Near Term; Neutral Rating Maintained


Wednesday, August 03, 2016 8:55am /FBNQuest Research

Upward revision to estimates; PT unchanged
Okomu Oil’s (Okomu) Q2 2016 results came in stronger than we expected. Sales, PBT and PAT were ahead by 21%, 44% and 34% respectively. Consequently, we have raised our EPS estimates over the 2016-17E period by 12.6% on average.

Despite the increase to our estimates, we have left our price target unchanged at N38.40. We have rolled over our DCF valuation to 2017 and trimmed our beta to 0.5 from 0.6.

However, positive effects from these changes are offset by the decision to increase our risk free rate assumption by 200bps to 14.5%, hence our unchanged price target. Okomu shares have gained 15.5% this year and have outperformed the broad index by 17.9%.

The shares are trading on 2016E P/E of 8.0x (vs c.30x for the consumer goods names) for average EPS growth of 2.2% y/y over the 2016-18E period. Despite the recent rally in the shares (+20.7% in 3M, ASI: 11.6%), we still see upside potential of around 10% to our N38.40 price target. We are retaining our neutral rating on the stock.

Positive near term outlook
Okomu’s Q2 numbers were boosted by the palm oil segment. While rubber sales declined by -10% y/y during the quarter, palm oil sales advanced by 81% y/y. Management has attributed the strong palm oil sales growth to pricing. We believe that the favorable pricing was mainly due to weaker competition arising from smugglers and more expensive imports.

We recall that the CBN banned the sale of forex to palm oil importers last year. In the near term, we expect these supportive trends to still persist; hence, impact of prices should remain relatively positive. We see sales and PBT growing by 25% y/y and 63% y/y respectively in 2016E.

Q2 2016 PBT and PAT up markedly y/y
Okomu’s Q2 2016 results showed that sales of N4.2bn were up 64% y/y while PBT and PAT grew by wider margins of 139% y/y and 147% y/y respectively to N2.3bn and N2.0bn. The strong sales growth was mainly responsible for the growth in earnings. A 31% y/y reduction in net finance costs also helped, despite a 24% y/y increase in total costs (cost of sales + operating expenses).

On a sequential basis, sales advanced by 27% q/q while PBT and PAT grew by 39% q/q and 25% q/q respectively. The strong q/q growth can be partially attributed to seasonality as Q2 is one of Okomu’s strongest quarters.

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