Culled—Proshare
August 16, 2017/FBNQuest Research
Modest upward revisions to our estimates and price target
Okomu Oil’s (Okomu) Q2 2017 results came in stronger than we expected mainly because of a positive surprise on the gross margin line. Consequently, we have increased our earnings estimate over the 2017-18E period by 10% on average and our price target by 27% to N72.4.
The increase to our price target is much higher because we rolled over our DCF valuation to 2018. Okomu shares have returned 81% this year (NSEASI: 38%) and are trading on a 2017E P/E multiple of 8.0x for EPS growth of 5% y/y in 2018E.
From current levels, the shares are trading close to our fair value estimate of N72.4 As such, we are retaining our Neutral rating on the stock.
Q2 2017 PBT and PAT up 94% y/y and 58% y/y respectively
Okomu’s Q2 2017 results showed that sales grew by 56% y/y to N6.6bn. PBT and PAT of N4.4bn and N3.2bn advanced by 94% y/y and 58% y/y respectively. Although net interest costs and operating expenses increased by 50% y/y and 16% y/y respectively, these were not strong enough to offset the strong sales growth and a 250bp y/y gross margin expansion to 99.7%, leading to the PBT growth.
The PAT growth was slower due to a higher tax rate of 28% compared with 12% in Q2 2016. On a sequential basis, sales grew by 12% q/q, which we attribute to seasonality.
The end-Jun quarter is usually the strongest quarter for the palm oil companies. Due to the q/q sales growth and a 2,109bp q/q gross margin expansion, PBT advanced by 30% q/q, despite a 64% q/q increase in operating expenses. PAT growth slowed to 3% q/q on the back of a higher tax rate (versus 10% recorded in the prior quarter).
Outlook
Okomu’s palm oil business recorded sales growth of 59% y/y while the rubber business grew sales by 23% y/y during the quarter. The rubber segment now accounts for just 8% of the company’s topline (vs 40% in 2011).
As such, the palm oil business remains the driver of growth. Okomu’s Q2 2017 results were ahead of our estimates mainly due to better-than-expected gross margin of 99.7%.
However, we do not believe this level will be sustained for the balance of the year due to seasonality. Okomu’s peak season is the end-March quarter and the company usually has higher maintenance costs in the off-peak seasons.
We have forecasted gross margin of around 80% for the full year and we see sales and PBT growing by 54% y/y and 97% y/y respectively.
