October 19, 2018/Cordros Report

OKOMUOIL released Q3-18 result earlier today, showing revenue dropped 9% y/y to NGN3.74 billion, while post tax profit surged 7.2x y/y to NGN1.3 billion, translating to an EPS NGN1.36 (Q3-17: NGN0.17).

• Whilst revenue came in short of our expectation, we highlight that the sharp jump in PAT was on the back of (1) extremely low base in the corresponding period of last year (2) faster decline in COGS (-58% y/y to NGN504 million) relative to revenue, and (3) lower effective tax rate.

• We highlight that the weaker than expected revenue was, to a large extent, caused by dwindling global CPO prices (-10.2% q/q) which translated to pressured local CPO prices. In our view, sustained FX stability is likely to have aided smuggling of crude palm oil, thereby putting further pressure on domestic prices.

• Following the jump in gross profit, as well as the decline in OPEX (-10% y/y to NGN1.46 billion), operating profit expanded for the period, with the corresponding margin rising by 16pps to 47.4%.

• Elsewhere, the company reported net finance charge of NGN3.2 million (Q3 17: Net finance income of NGN64 million). Finance cost increased by 12% y/y following surge in interest on long term loan (+43% y/y) which neutered the sharp moderation in exchange loss (-78% y/y). On a q/q basis however, finance charges moderated sharply by 43% q/q to NGN78 million, having fully paid down the FCY portion of its long-term loan. Meanwhile, finance income declined by 44% y/y to NGN75.2 million, owing to moderation in interest earned on fixed deposit.

• OKOMUOIL’s disappointing performance is not unexpected, as H2 performance has historically been weaker compared to H1, no thanks to seasonality factor between Apr-Jun and traditionally being an off-peak period for Crude Palm Oil (CPO) production.

Comment: Okomu’s performance sustained weakness from the prior quarter and still struggles to replicate the impressive result in Q1-18. YtD, the stock has returned +17.9%, compared to all share index loss of 14.6%. Okomu currently trades at 8.59x compared to Bloomberg peer average of 49.9x. Our last communicated TP is NGN90.30, which implies a potential upside of 13.1%. Our model is under review.