Okomu Oil Palm Sustains Good Results

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EQUITIES WATCH

After recording impressive results in 2016, Okomu Oil Palm did not fail to deliver in the first quarter of 2017, effectively validating the federal government’s calls for more focus on agricultural

The federal government’s determination to diversify the nation’s economy from oil as the major source of revenue is very obvious. The government is making various efforts to ensure that more focus is directed towards the agricultural sector. Through the Central Bank of Nigeria (CBN), the government is introducing various financing schemes to encourage investments in the agricultural sector, especially in fishery and rice production. While some may want to ask how viable the agricultural sector is, the performances of some listed companies in the agricultural sector of the Nigerian Stock Exchange (NSE) are some of the evidence.

Two listed companies- Okomu Oil Palm Plc and Presco Plc, playing the oil palm and rubber production segments of the agricultural sector, have been recording impressive performances in the recent years. They have not only been turning in profits but they have also been declaring dividends to shareholders and paying taxes to the government. These are indications that if more companies invest in the agricultural sector and the government provides the conducive environment for businesses to drive, the dependency on crude oil as the mainstay of the economy would be a thing of the past in no distant future. Besides, more shareholders would smile to the bank, while the government would also enjoy more benefits in terms of taxes paid by such companies.

Despite the challenging operating environment in 2016, Okomu Oil recorded improved performance in both top and bottom-lines. It has also consolidated the 2016 full year performance with similarly impressive results for the first (Q1) quarter ended March 31, 2017.

Financial Performance
In the audited results of the Okomu Oil for the year ended December 31, 2016, the company posted revenue of N14.365 billion, showing an increase of 47 per cent over N9.738 billion. Finance income improved from N43 million in 2015 to N291 million, while finance cost equally surged from N429 million to N1.340 billion. Profit before tax (PBT) jumped by 103 per cent from N2.898 billion to N5.906 billion, while profit after tax (PAT) rose by 84 per cent to N4.910 billion, from N2.659 billion in 2015.

In terms of efficiency measured by profit margin, Okomu Oil Palm did well as net profit margin improved from 27.3 per cent in 2015 to 34.1 per cent in 2016. Based on the improved results, the company declared a dividend of N1.43 billion, which translates to 150 kobo per share.

The company consolidated the 2016 performance during the first quarter ended March 31, 2017. Revenue stood at N5.896 billion in Q1 of 2017, up from N3.326 billion, cost of sale jumped from N529.775 million to N1.264 billion. Despite the jump in cost of sale, gross profit improved significantly from N2.796 billion to N4.632 billion, while profit after tax rose to N3.069 billion, showing a growth of 92 per cent above the N1.595 billion in the corresponding period of 2016.

Healthy fundamentals

Assessing the fourth (Q4) quarter results of Okomu Oil, analysts at FBN Quest said the performance came in stronger than they expected.
According to them, the variance versus their estimates was mainly due to a positive surprise in sales. They explained that for the coming year, Okomu management has guided to palm oil output of around 46,000te for palm oil, implying volume growth of around 25 per cent.

“On the back of the stronger-than-expected earnings and the company’s guidance, we have increased our earnings estimates by 39 per cent on average over the 2017-18 estimated (E) period and our price target by 28 per cent to N57. Okomu shares are trading on a 2017E price earnings ratio (P/E) of 8.1x for average earnings per share (EPS) growth of 14.8 per cent in 2018E,” they said.

Palm Oil Remains Main Driver
An analysis of Okomu’s Q4 numbers showed that they were boosted by its palm oil business, which recorded sales growth of 75 per cent versus 69 per cent growth for the rubber segment. The palm oil business now accounts for 85 per cent of total sales compared with 60 per cent levels in 2011.

“We attribute the palm oil sales growth to both volume and pricing. Owing to the CBN’s restriction of foreign exchange to palm oil importers and the devaluation of the currency, Okomu has been able to benefit from reduced competition and favorable pricing. Although the net finance cost line surprised negatively in Q4 2016 (Okomu booked a foreign exchange loss of N1.0 billion due to foreign loans and creditors), we do not believe the company’s exposure to foreign credit will deter it from delivering strong earnings in the near term. For FY 2017E, we see sales and PBT growing by 26 per cent and 40 per cent respectively,” FBN Quest said.

The analysts said while Q4 sales growth of 74 per cent to N3.5 billion, PBT and PAT advanced by wider margins of 132 per cent and 62 per cent to N797 million and N735 million respectively.
“Although finance costs grew by over 1,000 per cent and operating expense reversals were lower year on year(y/y), these were not strong enough to offset the strong y/y sales growth and a 4,315basis points(bp) y/y gross margin expansion, leading to the 132 per cent y/y increase in PBT. Due to a 227bp y/y expansion in the tax rate, the PAT growth was softer. On a sequential basis, sales were up modestly q/q,” they said.

Looking at 2017 Q1 performance, FBN Quest said sales grew by 77 per cent to N5.9 billion, PBT grew by 108 per cent to N3.4 billion while PAT of N3.1 billion advanced by 92 per cent. “Although gross margin contracted by -551bps y/y to 78.6 per cent and operating expenses increased by 11 per cent, these negatives were more than offset by the strong sales growth, and to a lesser extent, a 94 per cent y/y decline in net finance costs leading to the strong bottom line. PAT growth was softer due to an effective tax rate of 9.6 per cent compared with 2.4 per cent in the corresponding quarter of 2016. On a sequential basis, sales were up 71 per cent q/q. Despite a significant increase in operating expenses (-N1.2 billion versus +N379 million in the prior quarter), PBT and PAT grew by wider margins of around 320 per cent q/q on average due to the strong sales growth, a +4611bp q/q gross margin expansion and a significant y/y reduction in net finance costs. We attribute the significant q/q gross margin expansion to base effects,” they said.

They explained that Okomu usually reports weak gross margins in Q4 relative to other quarters – most likely related to accounting adjustments.

“Compared with our estimates, Q1 sales were ahead by 34 per cent while PBT was significantly ahead,” they said.
A breakdown of the revenue figure shows that palm oil sales of N5.1 billion grew by 74 per cent y/y during the quarter while rubber sales of N773 million advanced by 112 per cent.

“We attribute the strong sales growth for the palm oil business to both pricing and volumes. Okomu management has revealed that the company is implementing an aggressive expansion plan, in 2016, the total area for palm oil production increased by 36 per cent y/y to 14,463ha. In addition, we continue to believe that local palm oil producers have been benefiting from policies by the CBN through favorable pricing. For rubber, pricing may have helped the business to grow. The company indicated that average rubber prices increased by 22 per cent y/y in 2016.

Okomu’s sales and PBT are tracking significantly ahead of consensus FY 2017E estimates of N18.5 billion and N8.7 billion respectively. As such, we expect upward revisions to consensus estimates,” FBN Quest said.