Culled—Proshare
Thursday, April 13, 2017/ 5.38 PM / ARM Research
Yesterday, we engaged management of “The Okomu Oil Palm Plc” (Okomu) on their FY 2016 result as well as its prognosis for FY 2017. Please find below key discussion points from the call.
Top-line Performance
Management attributed robust turnover to higher commodity prices (CPO: +55% YoY and Rubber: +22% YoY) which was partly induced by naira depreciation. With regards to volume, Okomu produced 36,260 tonnes of CPO (unchanged from prior year) while rubber sales contracted 9% to 7,140 tonnes. The decline in rubber volume reflected impact of wind damage and fire outbreak in parts of the company’s rubber plantation.
Input Costs
Management attributed the decline in COGS to import substitution which afforded the company cheaper domestic substitutes. According to management, the proportion of imported raw materials to input cost was reduced to circa 10% as at the end of 2016. Furthermore, wages, which constitute 65% of overall cost, was largely contained.
FX loss
Okomu’s Managing Director attributed the higher FX loss to increased dependence on parallel market for partial repayment of foreign debt and financing of imported raw materials.
Outlook
Revenue
Management expects mean CPO prices to remain higher than last year despite recent downtrend in domestic prices. The bearish trend reflects a combination of lower demand, naira appreciation at the parallel market as well as improved domestic supply—following the commencement of the CPO harvest season in the country.
Given the more recent reversal of parallel market naira fortunes, management is hopeful of stable CPO prices going forward. Elsewhere, amidst bullish trend in rubber prices so far this year (+6% YTD) and a particularly low base in 2016, average rubber prices is similarly projected higher over the financial year.
With regards to volumes, management projects a 10% increase in CPO production to 40,000tonnes over the coming year while rubber sales should remain below its 2014 peak of 7000tonnes. Overall, management forecasts an upbeat revenue picture for 2017.
Input Cost
Given that prices are exogenously determined, Okomu is focusing on cost cutting measures for improved earnings performance.
Elsewhere, the company’s expansion plans, which has culminated in higher CPO farmland, (another 4000ha scheduled over 2017) and increased utilization of fertilizer (20% of input costs), should ordinarily apply upward pressure on COGS.
However, the company is looking to replace its expensive fertilizer with cheaper substitutes domestically, if available, or focus on obtaining cheaper alternatives externally.
Furthermore, the company is hoping to connect to the national grid in 2017, a drive which could reduce power cost by 60%. While the test run for the project is currently ongoing, we do not expect substantial progress on this front before the end of H1.
Overall, management projects continued growth in bottom-line over 2017.
Our View
We believe Okomu should continue to enjoy benefits from benign pricing environment irrespective of recent downtrend in CPO prices.
In addition, prospect of higher CPO production bodes well for overall top-line. Given the largely price-inflated sales growth as well as management’s belt tightening measures, we are of the view that the company’s earnings would maintain its strong momentum over 2017.
Overall, we are positive on Okomu with current price of N52.51 at 28.3% discount to our FVE of N67.37. We have a BUY rating on the stock.
