Culled—-Proshare

October 31, 2016/FBNQuest Research

Late this morning, Okomu Oil (Okomu) reported Q3 2016 results which showed sales growth of 22% y/y to N3.4bn. PBT and PAT advanced by wider margins of 188% y/y and 60% y/y to N1.2bn and N581m respectively. The strong sales growth was mainly responsible for the growth in earnings. A -16% y/y decline in operating expenses also helped.

Gross margin and net finance costs were flattish during the quarter. Sequentially, sales were down by -20% q/q which we attribute to seasonality. Q2 is usually Okomu’s strongest quarter. PBT and PAT fell by 48% q/q and 71% q/q respectively, owing to  a 10% increase in total costs (cogs + opex) and a 39% q/q increase in net finance costs.

On a 9M basis, sales grew by 41% y/y. Again, PBT and PAT advanced by wider margins of 100% y/y and 89% y/y respectively due to the strong sales growth, a 428bp y/y gross margin expansion and a -27% y/y decline in net finance charges.

A breakdown of the revenue figure shows that palm oil sales were the major driver of the company’s overall topline growth. The business grew sales by 27% y/y to N2.7bn during the quarter while rubber sales grew by 5% to N653m. The rubber business now accounts for 13% of Okomu’s sales as at end-Sept 2016 vs 40% in 2011.

We believe the strong growth in palm oil sales was mainly as a result of expansion plans by the firm. In the past, Okomu management expressed plans to aggressively expand the company’s palm oil plantation. We also suspect that weaker competition from imports due to fx devaluation likely helped Okomu gain share and boosted its topline. As for rubber, we believe unfavorable global prices were mainly responsible for the weak performance of the commodity although the company may have recorded some fx gains from exports. Okomu exports all its rubber.

On an annualised basis, 9M sales are on course to meeting consensus FY estimates of N13.2bn. PBT is lagging behind by around 7% while PAT is tracking ahead by 23%.

Year to date, Okomu shares have gained 35.3%, significantly outperforming the NSE ASI which has declined -4.7%. On our published estimates, Okomu shares are trading on a 2016E P/E of 9.4x (vs c.30x for the consumer goods names) for average EPS growth of 2.2% y/y over in 2017-18E.

Thus, FBNQuest rates the stock Neutral, while estimates are under review.

Okomu Oil’s Q3 2016 results: actual vs. FBNQuest Research estimates (N millions)